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<title>The full bottle: Bordeaux château flops Aussie wine injunction claim</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/the-full-bottle-bordeaux-chateau-flops-aussie-wine-injunction-claim/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Tue, 19 Mar 2024 23:31:20 +0000</pubDate>
<category><![CDATA[Misleading conduct]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20321</guid>
<description><![CDATA[A Bordeaux wine estate’s recent injunction claim against a Tasmanian winemaker has produced a rich blend of intriguing information about the international wine business and Australian wine consumption. Vieux Château Certan produces two types of expensive French red wine using various high-end grapes. It sued Australian brand Pipers Brook Vineyard, a company majority owned by […]]]></description>
<content:encoded><![CDATA[A Bordeaux wine estate’s recent injunction claim against a Tasmanian winemaker has produced a rich blend of intriguing information about the international wine business and Australian wine consumption.
Vieux Château Certan produces two types of expensive French red wine using various high-end grapes.
<img data-dominant-color="b29b80" data-has-transparency="false" style="--dominant-color: #b29b80;" fetchpriority="high" decoding="async" class="not-transparent alignleft wp-image-20325 size-medium" title="The full bottle: Bordeaux château flops Aussie wine injunction claim" src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1423384412-300x200.webp" alt="" width="300" height="200" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1423384412-300x200.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1423384412-1024x683.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1423384412-768x512.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1423384412-1536x1024.webp 1536w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1423384412-2048x1365.webp 2048w" sizes="(max-width: 300px) 100vw, 300px" />It sued Australian brand Pipers Brook Vineyard, a company majority owned by Kreglinger for wrongly representing an association with and passing-off as its elite château product.
VCC’s Federal Court injunction claim in Melbourne claimed a high degree of visual similarity between the presentation of its wine – the use of a pink cap, a label featuring a stately rural home, French text, and the name “Certan” – and Pipers Brook New Certan product and that the Tasmanian producer thereby represented it was in some way connected with them.
VCC produces 30,000 to 50,000 bottles annually but sales in Australia have been very limited. It retails here for between approximately $500 and $800 per bottle.
One of Pipers Brook’s estate – Mount Pleasant – is situated on land owned by Paul de Moor, a Kreglinger director who claimed to be a descendant of the Belgian wine merchant Georges Thienpont whose family had developed a VCC estate in Pomerol in the Bordeaux region of France that lies to the east of the Dordogne River, part of the wine making region referred to as the Right Bank.
To decide the contest Justice Johnathan Beach heard evidence from 10 wine experts over six days to determine whether or not the similarities were likely to mislead consumers of fine wine and members of the fine wine trade to erroneously believe there was such an association.
His 112 page judgment is a rich in observations from wine experts about French and Australian vino.
Imported wines accounted for 31.4% of the Australian wine market by value, (US $1.907 billion) of which the majority of those wines originate from France (37.6% by value) and New Zealand (40.1%).
Bordeaux represents just 1% of all French wine sold in Australia for off-premises consumption.
$25 is the demarcation price point for identifying non-premium product according to wine author and critic, Jeremy Oliver.
A consumer purchasing a wine under $25 is someone who “likes wine but is not obsessed by it”. This type of consumer, he said, may buy a $50 bottle of wine for a gift or special occasion, but not very often.
Such a consumer has minimal knowledge of Bordeaux estates but might have heard of some of the more elite châteaux like Lafite and Latour, and maybe even Haut-Brion from Graves.
Buyers of $70 to $100 bottles of wine on the other hand are likely to be people with a cellar or collection, are wealthier, better educated about wine, subscribers to a wine publication or website, users of wine apps such as Vino and Decanter, members of a wine club or a wine group and visitors to wineries much of which they do to gain knowledge they can show off.
A typical Australian buyer of a $500 Pomerol wine would generally obtain a personal allocation from a “negociant” and buy it to consume at the optimum time a decade or so later.
Tasmanian pinot noir is typically light to medium body in structure and of medium flavour intensity – he observed – whereas the premium wines from the right bank in Bordeaux deliver significant depth of flavour and structure. In his opinion, they could hardly be more different.
Mr Oliver said that in his experience a Tasmanian pinot noir drinker would be more expected to gravitate to and be far more interested in Burgundy and Rhone wine, unless they are an individual who likes and purchases every style of wine, which is rare.
Other experts gave evidence including wine writer and critic Jane Faulkner, wine importer and distributor Daniel Airoldi, MW Master of Wine Andrew Caillard, Negociants Australia’s Timothy Evans and wine judge Philip Rich.
None of these experts were in Justice Beach’s view “representative of the ordinary and reasonable consumer”.
Huon Hooke – a professional wine writer and critic – and Ms Faulkner both swore they thought the pink cap and label similarities and name “Certan” spoke to them of a connection between Pipers Brook and VCC.
In its defence Pipers Brook argued that despite the similarity of appearance, there was no risk of confusion because few Australian consumers of Tasmanian pinot noir would have heard of, far less be able to recall much if anything about the VCC product even if they had at one time or another encountered it.
After all, the brand described it as Pinor Noir from Tasmania not a Bordeaux from France.
And, so ran their argument, New Certan is sold in a Burgundy shaped bottle – the bottle shape used for pinot noir – whereas VCC Wine is sold in a classic Bordeaux (cabernet sauvignon) shaped bottle.
Justice Beach agreed. Very few consumers would ever have been exposed to the pink cap and other visual features of the VCC presentation and, he thought, they would not be representative of the ordinary and reasonable consumer.
That said, he accepted that those very fortunate people who can afford to collect wines from Pomerol and Right Bank châteaux – typically deep enthusiasts – might also be prepared to buy a $75 to $95 Tasmanian pinot noir.
Thus by a thin margin he was satisfied VCC has made out its case that at lease that narrow class of consumers – members of the fine wine trade who had knowledge of the French original – were likely to have been misled or deceived into thinking that the New Certan wine had some association with VCC.
That though was only up to the time Pipers Brook changed the presentation of its New Certain pinot noir. The change to a bronze cap and an off white, straight-edged label, eliminated any prospect of confusion and therefore CVV’s request for an injunction should be refused.
The judge – in assessing what loss VCC had suffered by reason of the “passing-off” for that limited period to a very limited class of consumer – concluded there had been no loss or damage to it from Piper Brook’s conduct.
The judge also found de Moor had not created the label with any intention to deceive or mislead: “His motivations for creating the New Certan wine were quite personal,” derived from his familial connection to VCC in that he was in fact the grandson of Georges Thienpont’s only daughter.
Justice Beach accepted Piper Brook’s undertaking not to sell the remaining 1,755 bottles of New Certan in pink cap bottles that had previously been marketed on the Kreglinger website and via the Qantas Frequent Flyer loyalty program.
He also refused CVV’s demand that the Piper Brook trademark for “New Certan” be cancelled on the ground of its similarity to its “Vieux” (old) Certan label because that argument wrongly assumed Australian consumers understand the meaning of that word and would recollect the name Vieux Château Certan.
Because each party had had “some measure of success” on their arguments, he ordered that Pipers Brook was not required to pay any of CVV’s legal costs of its claim.
<a href="https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2024/2024fca0248" target="_blank" rel="noopener">Societe Civile et Agricole du Vieux Chateau Certan v Kreglinger (Australia) Pty Ltd [2024] FCA 248 Beach J 15 March 2024</a>
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<item>
<title>Buyer falls flat: No PEXA extension for lender’s failure to settle</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/buyer-falls-flat-no-pexa-extension-for-failure-to-settle/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Mon, 18 Mar 2024 21:12:35 +0000</pubDate>
<category><![CDATA[Property development]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20319</guid>
<description><![CDATA[A property developer who signed up the $4 million buy of a 52 acre development site in Rockbank, in Melbourne’s outer west in August 2017 has stumbled at the finish line when it failed to have finance available to settle 5 years later. The contract required VS Property to settle with sellers Nick and Sherryn […]]]></description>
<content:encoded><![CDATA[A property developer who signed up the $4 million buy of a 52 acre development site in Rockbank, in Melbourne’s outer west in August 2017 has stumbled at the finish line when it failed to have finance available to settle 5 years later.
The contract required VS Property to settle with sellers Nick and Sherryn Zurzolo on 5 November 2020.
<img data-dominant-color="c1685f" data-has-transparency="false" style="--dominant-color: #c1685f;" decoding="async" class="not-transparent alignleft wp-image-20328 size-medium" title="A property developer whose failure to settle a $4 mil buy of a 52 acre development site in Rockbank has lost his case to force the seller to complete" src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-147875257-300x200.webp" alt="" width="300" height="200" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-147875257-300x200.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-147875257-1024x683.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-147875257-768x512.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-147875257-1536x1024.webp 1536w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-147875257-2048x1365.webp 2048w" sizes="(max-width: 300px) 100vw, 300px" />
After signing, a dispute arose with the relevant water authority – to which the buyer became a party – in relation to the vendors’ grant of an <a href="https://qldbusinesspropertylawyers.com.au/blog/knowledgebases/what-is-an-easement-things-to-know-if-theres-an-easement-on-your-property/" data-internallinksmanager029f6b8e52c="2" title="What is an easement? Things to know if there's an easement on your property" target="_blank" rel="noopener">easement</a> to the authority over part of the subject land.
The dispute remained unresolved due in part to the buyer seeking a significantly higher amount of compensation for the easement than that which the Zurzolos had agreed to.
The settlement date of 5 November 2020 passed and with no resolution in sight.
In March 2022, the Zurzolos – who were facing personal and financial difficulties due to the delay – called for settlement on or before 2 May 2022.
Buyer and seller were both aware the value of the land had also increased significantly.
After a further failure to settle on 11 May, the Zurzolos purported to terminate the contract due to the purchaser’s failure to settle.
But then in late June they served a 14 day default notice on VS calling for settlement by 12 July under pain of termination.
The water easement dispute was eventually settled in July with a settlement deed that agree the settlement date be extended to 15 September 2022.
The buyer was however unable to put the finance required to settle in place and completion did not occur.
The vendors – who had been ready, willing and able to settle – terminated pursuant to the settlement deed provision that treated the contract as automatically at an end by reason of the buyers not completing on the due date.
VS contested the termination and issued court proceedings for specific performance.
Its first contention was that the settlement deed automatic termination provision was not engage because the failure to settle was not a “default” on its part resulted only by reason of delay in their lender’s processes.
Justice Michelle Quigly agreed there was a distinction between the terms ‘fault’ and ‘default’ but held the buyer’s conduct was indeed a ‘default’ notwithstanding it arose from someone else’s ‘fault’.
The buyers further contended the termination – in the absence of a prior 14 day ‘Default Notice’ that the contract itself otherwise provided – was invalid.
Justice Quigly also rejected this argument. In her view, the failure to settle triggered the operation of the termination clause but not to bring it to an automatic end but the settlement deed term specifying contract coming “immediately to an end” effectively overrode the 14 day default notice period in the contract itself.
By notification of termination in the absence of a default notice, the sellers had – she ruled – lawfully terminated the contract.
Not to be outdone, the buyers also argued the seller’s termination was in breach of a special condition requiring – in the case of an electronic settlement – the parties to ‘do everything reasonably necessary to effect settlement on the next business day’ if it does not occur by the end of the agreed date.
Justice Quigly noted the ‘next day’ settlement provision was only to apply in circumstances where the PEXA electronic workspace was ‘locked’ at the nominated settlement time but settlement has not occurred by 4:00pm (or 6:00pm, if the nominated settlement time is after 4:00pm).
She noted the provision dealt with a situation where settlement does not occur because of some technical malfunction arising after the workspace has ‘locked’ and dismissed the assertion that the clause could be relied on in these circumstances.
“I reject the notion that Special Condition 2.7 can be relied on in circumstances where settlement did not occur at the scheduled settlement time because the purchaser had failed to secure finance by the agreed settlement date,” she wrote in her 47 page judgment.
“It would be a nonsensical interpretation to [say] it provides carte blanche to allow an additional day to complete settlement for a reason not associated with the mechanism and requirements of the technical procedure of the electronic settlement regime”.
The buyer’s claim for specific performance was dismissed and damages for the buyer’s breach were ordered as was the removal of the buyer’s caveat. The judgment does not refer to any amount of damages that the seller’s had claimed.
<a href="https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2024/89.html" target="_blank" rel="noopener">VS Property and Holding Pty Ltd v Zurzolo [2024] VSC 89 Quigly J, 6 March 2024</a>
]]></content:encoded>
</item>
<item>
<title>Agency in rent roll contract win; judge’s errors prolong 6 year fight</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/agency-in-rent-roll-contract-win-judges-errors-prolong-6-year-fight/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Mon, 18 Mar 2024 09:58:09 +0000</pubDate>
<category><![CDATA[Rent roll]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20316</guid>
<description><![CDATA[Investors who defaulted on a rent roll buy have been ordered to pay more than $200,000 for the disruption caused to the seller by their last-minute refusal to settle. Babstock Pty Ltd sold its $800,000 residential management portfolio to Marburg Investments Pty Ltd – of which Dorothy Marburg was the sole director – in December […]]]></description>
<content:encoded><![CDATA[Investors who defaulted on a rent roll buy have been ordered to pay more than $200,000 for the disruption caused to the seller by their last-minute refusal to settle.
Babstock Pty Ltd sold its $800,000 residential management portfolio to Marburg Investments Pty Ltd – of which Dorothy Marburg was the sole director – in December 2017.
<img data-dominant-color="b7b8b7" data-has-transparency="false" style="--dominant-color: #b7b8b7;" decoding="async" class="not-transparent alignleft wp-image-20327 size-medium" title="Agency in rent roll contract win; judge's errors prolong 6 year fight " src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1270110980-300x200.webp" alt="" width="300" height="200" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1270110980-300x200.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1270110980-1024x683.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1270110980-768x512.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1270110980-1536x1024.webp 1536w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1270110980-2048x1365.webp 2048w" sizes="(max-width: 300px) 100vw, 300px" />
The rent roll contract was due to complete in February but after a number of extensions settlement was set for May 2018.
Alan Marburg – Dorothy’s husband who was to operate the business despite no experience in the role – spent 4 weeks or so prior to completion in the seller’s Bellbowrie office to learn the ropes and get a taste of how hard managing residential tenancies, tenants and owners might be.
The couple also engaged an expert consultant – who reported only trivial irregularities in the management paperwork – to satisfy themselves of the agency’s regulatory compliance.
When it came time to stump up with the cash, Mr Marburg alleged flaws he had discovered in entry condition reports (ECRs) for some 30 of the 148 properties under management even though the buyer had notified it was satisfied with such issues on due diligence.
The seller called for settlement noting that the rent roll contract allowed for managements with unrectified documentation to be retrospectively rejected on the adjustment date 90 days following settlement and any money paid for them, refunded to the buyer from the retention fund.
Babstock had already announced the sale and the retirement of its key staff to its owners and introduced Mr Marburg as a competent and reliable successor by the time the buyers’ new solicitor contended that the seller was “in anticipatory breach” and purported to terminate.
The seller rectified most of the buyer-claimed paperwork defects before nominating a time and place for completion on the due date and when that didn’t occur, again one week later.
The Marburgs refused to settle and alleged the seller to have been in breach. They then sued for recovery of their $40,000 deposit. The agency counterclaimed for the managements and revenue it lost after having to go cap in hand back to owners to get new appointments signed up.
Judge Kenneth Barlow ruled in the Marburgs’ favour in the District Court in December 2020 by accepting their “anticipatory breach” contention.
That decision was reversed by the Court of Appeal in April 2022 which concluded the seller had not breached the sale contract when insisting on settlement regardless of paperwork deficiencies.
Its adherence to rent roll contract usual practice – for rejected managements to be accounted for at the end of the 90-day retention period if the deficiencies remained unrectified – was upheld.
But because Judge Barlow had addressed neither the Marburg’s misleading conduct claim nor the agency’s counterclaim, the appeal judges remitted the case back to him for further argument and a decision on those points.
In his second judgment in February 2023, the judge ordered the contract to be rescinded under Australian Consumer Law s 237 by reason of Alan Marburg having relied on misleading pre-contract statements.
Those statements – contained in the business broker’s Sale Information Booklet – were that the ECRs were 100% “fully signed by all tenants and agency staff” and all properties were in the immediate locality.
He concluded “at least 19 of the ECRs were not signed” or otherwise non-compliant and “16 properties were in suburbs other than Bellbowrie and Moggill” and that the buyer had relied on the former misleading statement (ECRs) but not on the second (property locations).
The ACL s 237 ruling was made notwithstanding the entitlement to such relief hadn’t been sought by Marburg “in pleadings or at the conclusion of the trial” and had only been asked for in submissions more than three years following the trial’s end.
The matter inevitably went to appeal for a second time.
On 25 January 2024, the Court of Appeal again reversed Judge Barlow’s decision by reason of the “substantial injustice” of numerous errors in his reasoning.
And in the absence of the determination of essential points by the judge, the appeal court was required to come to its own factual conclusions on many critical issues.
The appeal judges reasoned Babstock had correctly terminated the contract due to the buyer’s repudiation and thus “had an accrued right to keep the deposit and an accrued right to damages for breach of contract” which it assessed at $190,000.
Justice Jean Dalton in giving the lead judgment of the court concluded – by examining evidence that the trial judge hadn’t – that just 13 of the ECRs could not be described as “fully signed by all tenants and agency staff”. Oher irregularities were to trivial to be of concern.
Regardless, the buyer company could not have relied on the representations – which the seller conceded had been misleading – because the testimony of Dorothy Marburg, its sole director, was that “she had nothing to do with the proposed purchase…it was all her husband’s doing”.
“Mrs Marburg gave extraordinarily unhelpful evidence,” observed Justice Dalton. “I cannot see that any decision-maker could regard it as reliable, or a sufficient basis for a finding of reliance by Marburg Investments or by her as guarantor”.
Even if Mr Marburg was a de facto director – something the evidence hadn’t established – he knew there were ECR deficiencies but decided to go ahead at due diligence regardless.
“The trial judge was wrong to find that Marburg Investments relied upon the literal truth of the representations in the brochure…. he ought to have found to the contrary”.
Justice Dalton further reasoned – in overruling the trial judge’s finding that somehow the buyer was still relying on the brochure representations when deciding not to terminate on due diligence grounds – that even if such reliance had been proven, the chain of reliance causation had been broken by the buyer choosing to commission its own report upon which to rely.
Finally, Justice Dalton observed the buyer had not proved that it would have sustained any loss as a result of the misleading statements, had it been required to complete the contract. It could after all, have retrospectively rejected the tenancies still suffering from incomplete paperwork and be refunded the amount it had paid for them on the adjustment date. These were issues the trial judge did not consider.
In a summation – with which Justices Bond and Mullins concurred – Justice Dalton declared “the overwhelming weight of the evidence was against the trial judge’s findings; he misunderstood the significance of some important evidence; and he nowhere rests his finding on his observations of the Marburgs as they gave evidence”.
Rescission of the contract should not have been ordered because the buyer’s case was simply wrong on all points.
The appeal court – in doing what in retrospect the trial judge ought to have done in December 2020 – awarded Babstock over $200,000 in damages and interest as well as ordering the company and Mrs Marburg as guarantor to pay all the seller’s legal costs of the hearings and appeals.
Once costs are accounted for, the buyers will likely have spent the full equivalent of the purchase price and – instead of an asset – have only the indelible scars that 6 years of ultimately unsuccessful litigation can leave, to show for it.
<a href="https://archive.sclqld.org.au/qjudgment/2024/QCA24-003.pdf" target="_blank" rel="noopener">Babstock Pty Ltd & Anor v Laurel Star Pty Ltd & Anor (No 5) [2024] QCA 3 Mullins P and Bond and Dalton JJA, 25 January 2024</a>
]]></content:encoded>
</item>
<item>
<title>Court voids “utterly crushing” 417% p.a. interest; 70% p.a. ok</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/court-voids-utterly-crushing-417-p-a-interest-70-p-a-ok/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Sun, 17 Mar 2024 02:04:31 +0000</pubDate>
<category><![CDATA[Penalty]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20314</guid>
<description><![CDATA[A private lender’s interest rate of 417% has been ruled to be “utterly crushing” but a court has approved its 70% per annum rate on a $430,000 six-month loan. Connie Huang and her adult daughter Stephanie Chien applied for a “cash flow funding” loan in October 2019 through a website controlled by broker MaxFunding. They […]]]></description>
<content:encoded><![CDATA[A private lender’s interest rate of 417% has been ruled to be “utterly crushing” but a court has approved its 70% per annum rate on a $430,000 six-month loan.
Connie Huang and her adult daughter Stephanie Chien applied for a “cash flow funding” loan in October 2019 through a website controlled by broker MaxFunding.
<img data-dominant-color="9c9686" data-has-transparency="false" style="--dominant-color: #9c9686;" loading="lazy" decoding="async" class="not-transparent alignleft wp-image-20324 size-medium" title="A private lender's interest rate of 417% has been ruled to be "utterly crushing" but a court has approved its 70% per annum rate on a $430,000 six-month loan." src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-496766546-300x225.webp" alt="" width="300" height="225" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-496766546-300x225.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-496766546-1024x770.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-496766546-768x577.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-496766546-1536x1154.webp 1536w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-496766546-jpg.webp 1997w" sizes="(max-width: 300px) 100vw, 300px" />They offered their Burwood residence to which they attributed a value of $3 million as security and disclosed that it had a current $1.5 million mortgage debt to NAB.
MaxFunding referred the loan application to lender Commercial N who approved an advance repayable in 26 weeks with interest at 1.36% per week except when the lender notified in writing that it would accept interest at a lower rate of 0.35% per week.
The borrowers received advice from a local solicitor they had chosen from those suggested in the area by the broker and signed the loan and security documents which also provided that the higher interest rate was payable in all circumstances when the borrower was in default.
The valuation for the property came in late and low – just $2.6 million – resulting in reduction in the amount of the advance from $600k to $430k and denying the borrowers the additional cash they needed to service the interest for the six-month period.
The proceeds were fully deployed to pay out arrears on the NAB loan, clear another short-term $370k loan and meet the lender’s expenses.
When it came time to pay the first interest payment of $6,325 in November, they asked for a deferral and paid it in early December after a default notice had issued.
No further payments were made.
In March 2020 they were advised a payout figure of $530,000.
The lender filed suit in November 2022 to recover the principal and interest of $3.2 million calculated on a monthly compounding basis at the higher rate which annualised at 70.72%.
The borrowers retaliated with a challenge to the higher rate arguing it was as a penalty and therefore void.
The contract provided the higher rate was payable at all times unless notified otherwise and was not one that increases the rate of interest upon failure to make prompt payment.
The lender contented the interest rate provisions thus did not operate to penalise the borrower for breach but rather provided for a ‘concessional’ lower rate whilst ever there has been no default.
Put another way – it argued – the liability to pay interest at the higher rate compounding monthly “does not impose an additional or different contractual liability that arises upon the non-observance of the primary contractual obligation”.
Justice Trish Henry agreed. “The formula provides for an amount of interest that I would readily accept is seemingly extravagant, out of all proportion or unconscionable due to the operation of the capitalisation /compounding factor [but] I am not satisfied that those clauses are unenforceable as contractual penalties,” she decided.
Mrs Huang and Ms Chen also argued the terms were unconscionable having regard to s 12CC(1) of the ASIC Act and s 22(1) of the ACL and should therefore be varied.
The lender had known they were at a ‘special disadvantage’ – they alleged – particularly because Mrs Huang did not speak, read or write English and no translation certificate had been procured for her signing the documents. Further they were both financially experienced and the security documents were long and complicated.
They also submitted that a reasonable lender would have known they were certain to have defaulted once the advance was reduced and there were no surplus funds to pay interest while their exit strategy was put in place.
Justice Henry observed that an “unconscionability” finding requires more the mere breach of accepted standards of commercial behaviour and more than mere element of hardship or unfairness.
Rather, she explained “it requires conduct that is characterised by a substantial departure from that which is generally acceptable commercial behaviour that is so plainly or obviously contrary to what is expected, that it is offensive”.
The judge agreed that Mrs Huang’s inadequate English seriously affected her ability to make a judgement as to her own best interests and she therefore suffered a special disadvantage but concluded the loan was not unconscionable on that ground given there was “no doubt” both borrowers “understood the risk of not meeting their obligations to repay loan monies, particularly where secured by a registered mortgage against their residence”.
Neither was the “very high” 70.72% annual interest rate unconscionable in the absence of expert evidence stating same to be “excessive or even unusual in the context of a short-term financing by way of a second mortgage”.
That said, monthly capitalisation that lead to total interest of $3.2 million at an effective annual rate of about 417% “could never be said to be reasonably necessary for the protection of legitimate interests [and] is utterly crushing”.
She declared the monthly capitalisation provision to be void by reason of its unconscionability and ordered the interest to be calculated on a simple basis at 70.72% p.a. totalling $882k.
<a href="https://www.caselaw.nsw.gov.au/decision/18d5c73facd1f7f769f9c55c" target="_blank" rel="noopener">Commercial N Pty Limited v Huang & Ors [2024] NSWSC 23 Henry J, 31 January 2024</a>
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<title>DIY litigant opens up court on Sunday for fence dispute</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/diy-litigant-opens-up-supreme-court-on-sunday-for-a-fence-dispute/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Sat, 11 Nov 2023 23:40:37 +0000</pubDate>
<category><![CDATA[Fences and boundaries]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20291</guid>
<description><![CDATA[A neighbour spat over trees and a dividing fence dispute that drafted not one but two Supreme Court duty judges into the the courtroom for an urgent weekend sitting has been listed for a final hearing just over three weeks after the court proceedings were filed. Rhonda Slattery’s residential lot – in picturesque Davistown near […]]]></description>
<content:encoded><![CDATA[A neighbour spat over trees and a dividing fence dispute that drafted not one but two Supreme Court duty judges into the the courtroom for an urgent weekend sitting has been listed for a final hearing just over three weeks after the court proceedings were filed.
Rhonda Slattery’s residential lot – in picturesque Davistown near Kincumber on the NSW Central Coast – adjoined that of 30 yr career builder David Dunn and his wife Kim Dunn.
<img data-dominant-color="837a64" data-has-transparency="false" style="--dominant-color: #837a64;" loading="lazy" decoding="async" class="not-transparent alignleft wp-image-20300 size-medium" title="DIY litigant opens up Supreme Court on Sunday for a fence dispute" src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1467254245-300x225.webp" alt="" width="300" height="225" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1467254245-300x225.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1467254245-1024x768.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1467254245-768x576.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1467254245-1536x1152.webp 1536w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1467254245-jpg.webp 2000w" sizes="(max-width: 300px) 100vw, 300px" />In discussions over the development of their site – for which they had recently gained approval – she learned the Dunns wanted to replace the existing boundary fence which had been in situ for 16 years.
Ms Slattery floated two options for modification of the fence – part of which likely encroached on the Dunns’ land – neither of which were suitable to the Dunns.
Their proposal was to demolish the fence and rebuild a new one at their expense precisely on the common boundary and in the course of which “trim” the trunks of two paperbark trees and a concrete slab which they claimed encroached on to their land.
Slattery was concerned the proposal would imperil her trees and damage the concrete slab.
Her investigations revealed that the development consent from the NSW Central Coast Council did not provide approval for fencing work or demolition of the existing boundary fence.
Her anxiety escalated to alarm when she received a letter from the Dunns on Saturday 7 October notifying her they intended to commence boundary fence demolition works at 7.00am on the coming Monday.
Her response was to prepare paperwork for an urgent court application and drive to Sydney the following morning to open up the Supreme Court registry to file it and to find a judge to make orders to prevent the demolition.
Ms Slattery swore in her affidavit that the application needed to be dealt with urgently because – among other issues – she had two large dogs that need to be confined.
Siting in the Land and Environment Court, Justice Moore indicated he would grant the temporary injunctions to the self-represented – provided she gave the “usual undertaking”, ie to compensate the Dunns for losses suffered if their position prevailed over hers at the final hearing – restraining the Dunns from interfering with either of the paperback trees or demolishing any part of the concrete slab.
The application to restrain the demolition of the dividing fence was though – in his view – outside the jurisdiction of that court.
He therefore transferred the proceedings to the weekend Supreme Court equity judge, Justice Trish Henry, who considered the fence application later that Sunday also on an ex parte basis.
Ms Slattery was – after having been again called on to give the “usual undertaking” and again obliging by giving it – granted her the stop-demolition injunction which she was ordered to serve on the Dunns before 8pm that night.
The matter came before Justice Henry again two days later when she transferred it back to the Land and Environment Court thereby conferring on it the jurisdiction to deal the dividing fence issue which it had initially lacked.
When the matter came before Justice Sarah Prichard in the Land and Environment Court on 12 October, Ms Slattery was represented by counsel. Mr and Mrs Dunn were self-represented but were armed with an arborists report and a survey plan to prove the alleged <a href="https://qldbusinesspropertylawyers.com.au/blog/knowledgebases/dealing-with-land-encroachments-in-queensland/" data-internallinksmanager029f6b8e52c="3" title="Dealing with Land Encroachments in Queensland" target="_blank" rel="noopener">encroachments</a> and the suitability of the proposed trimming of the paperbark trees’ trunks.
The judge referred the matter for an on-site mediation and listed it for a further directions hearing on 18 October indicating it would be then listed for final hearing if not resolved. The injunctions were extended once again as were Ms Slattery’s undertakings.
The parties participated in the mediation but that proved unsuccessful and when the matter was next dealt with on 18 October, Ms Slattery appeared by telephone from the Central Coast, self-represented.
Justice Pritchard expressed her consternation that the matter hadn’t been resolved and warned them of the consequences of adverse costs orders and in Ms Slattery’s case, the risk of having to pay compensation by reason of her undertaking.
When Ms Slattery informed the judge that she didn’t understand the obligations comprised by the “usual undertaking”, the term was explained to her in some detail prompting the response “Yes, I do” to the judge’s “Do you now understand ?”
The matter was listed for a final hearing on 2 November but there is no record of a court determination on that date.
This may suggest that the parties – when faced with the risk of adverse costs orders and in Ms Slattery’s case the undertaking risks – may have resolved the dispute among themselves with a modicum of common sense.
Slattery v Dunn [2023] NSWLEC 107 Pritchard J, 18 October 2023 <a href="https://www.caselaw.nsw.gov.au/decision/18b3f8430cce82a01276d8ae" target="_blank" rel="noopener">Read case</a>
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<title>Lessor floored: make good costs reduced by windfall benefit</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/lessor-floored-make-good-costs-reduced-by-windfall-benefit/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Sat, 11 Nov 2023 03:12:58 +0000</pubDate>
<category><![CDATA[Commercial, retail & industrial leasing]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20289</guid>
<description><![CDATA[Landlords and tenants squabbling over make good costs in commercial leases should consider this dispute relating to an industrial warehouse leased to a heavy machinery hire company. Kingston Industries took up occupation of the western Sydney premises in August 2010 and after its lease extensions expired in July 2017, it continued occupation on a month-to-month […]]]></description>
<content:encoded><![CDATA[Landlords and tenants squabbling over make good costs in commercial leases should consider this dispute relating to an industrial warehouse leased to a heavy machinery hire company.
Kingston Industries took up occupation of the western Sydney premises in August 2010 and after its lease extensions expired in July 2017, it continued occupation on a month-to-month basis until December that year.
<img data-dominant-color="8e774d" data-has-transparency="false" style="--dominant-color: #8e774d;" loading="lazy" decoding="async" class="not-transparent alignleft wp-image-20299 size-medium" title="Lessor floored; make good costs reduced by windfall benefit" src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-89282768-300x200.webp" alt="" width="300" height="200" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-89282768-300x200.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-89282768-1024x683.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-89282768-768x512.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-89282768-jpg.webp 1254w" sizes="(max-width: 300px) 100vw, 300px" />Landlord Diana Morabito claimed Kingston was responsible for the make good cost of replacing concrete surfaces in the warehouse and the car park which she claimed had been shattered by the tenant’s steel track earthmoving equipment.
She demanded the former tenant pay $344,000 in make good costs plus lost rent of $295,000 for the 18-month period between when Kingston departed and the date the premises were re-let in June 2019.
The lease – which specified a permitted use of “Plant Hire/Distribution” – contained the usual provisions in relation to the tenant’s maintenance and repair obligations but excluded damage caused by the landlord’s negligence or which occurred “outside its control” from the realm of tenant’s responsibility.
The terms also prohibited the tenant from “allowing the floor to be broken or damaged by overloading”.
The landlord was obliged to “maintain the structure of the premises in good repair” but it gave no warranty or representation that they were suitable for the tenant’s use.
When Kingston refused to pay, the landlord filed proceedings to recover her make good costs in the NSW Supreme Court.
Morabito contended that the permitted use did not extend to moving steel tracked equipment on the concrete surfaces without using protective measures of mapping or steel plates.
Justice Elisabeth Peden had to consider whether machinery with steel tracks was “plant”- and therefore permitted – that would ordinarily be expected to be moved around.
She saw no need to resort to the principle that lease covenants including those in relation to permitted use “are strictly construed against a lessor” because the word “plant” unambiguously included the tenant’s steel tracked equipment – some of over 22 tonnes in weight – of which the landlord had been aware.
Suspecting that the concrete surfaces were defective, Kingston engaged engineers to inspect and test the damaged paving.
Kingston managed to locate Fernando Algorry, the engineer who originally designed the concrete surfaces who swore that – because he was not provided with instructions about the type required – he had adopted a standard specification for concrete suitable for light to medium industry and machinery with pneumatic tyres only.
He also attested that the concrete supplied to the job – by reference to the few cartage delivery documents the landlord produced in discovery – was even inferior to the grade of product he had specified.
And had he known what was actually supplied, he “would not have certified” the low grade concrete that had been supplied.
This allowed Kingston to argue the failure in the concrete fell into one of the exceptions to its maintenance and repair obligations because it was caused by the landlord’s negligence; beyond its control; or it had occurred as a result of “fair wear and tear”.
Justice Peden accepted Kingston’s submission that Ms Morabito’s failure to produce many missing cement truck delivery dockets entitled the court to conclude they would not benefit her case and that it should conclude all batches delivered had been of low grade.
She went on to conclude that the paving damage had not been caused by Kingston’s machinery or overloading but rather by “a matter beyond its control and for which it ought not be liable”.
She went on to consider the validity of landlord’s figures to decide the damages to which she would be entitled should an appeal court decide otherwise regarding the concrete defects.
In the absence of the landlord taking reasonable steps to mitigate her loss by promptly recruiting a replacement tenant, her claim for lost rent was dismissed.
The court also decreed that any damages for the cost to replace the damaged paving should be reduced by “the betterment obtained from the new concrete”. That benefit was – having regard to the projected 50 year “life” of the new concrete paving – an additional 7.5 years.
“A successful plaintiff should not be awarded a windfall amount by reason of obtaining a better outcome, than had the defendant performed its obligations”. Similar reductions apply if a landlord gains “greater efficiency or productivity” from the repairs conducted from make good funds.
Thus Kingston – if it were to be liable at all – would have had to pay the replacement cost for the slabs, reduced in proportion by such “betterment”.
And a $58,000 claim for other make good items was reduced to $3,320 because Mrs Morabito had not demonstrated the damage was caused by Kingston as opposed to “fair wear and tear”.
Morabito v Kingston Industries Pty Ltd [2023] NSWSC 1020 Peden J, 31 August 2023 <a href="https://www.caselaw.nsw.gov.au/decision/18a265aafda7b644a3371cce" target="_blank" rel="noopener">Read case</a>
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<title>Form fight: seller to pay agent 20% commission on terminated contract</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/form-6-fight-seller-to-pay-agents-20-commission-on-terminated-contract/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Wed, 08 Nov 2023 21:04:10 +0000</pubDate>
<category><![CDATA[Agency practice]]></category>
<category><![CDATA[commission dispute]]></category>
<category><![CDATA[Property Occupations Act & compliance]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20286</guid>
<description><![CDATA[How often do real estate agencies get their hands on a commission from a deal that goes sour and how rarely does that turn out to be a motza? Consider this real estate deal that crashed in 2020 but nevertheless reaped a $1.5 million commission for the agent concerned. In January 2018, tourism group Sunshine […]]]></description>
<content:encoded><![CDATA[How often do real estate agencies get their hands on a commission from a deal that goes sour and how rarely does that turn out to be a motza?
Consider this real estate deal that crashed in 2020 but nevertheless reaped a $1.5 million commission for the agent concerned.
<img data-dominant-color="a9b1a2" data-has-transparency="false" style="--dominant-color: #a9b1a2;" loading="lazy" decoding="async" class="not-transparent alignleft wp-image-20298 size-medium" title="How often do real estate agencies get their hands on a commission on terminated contract and how rarely does that turn out to be a motza?" src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-139681720-300x225.webp" alt="" width="300" height="225" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-139681720-300x225.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-139681720-1024x768.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-139681720-768x576.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-139681720-jpg.webp 1183w" sizes="(max-width: 300px) 100vw, 300px" />In January 2018, tourism group Sunshine Group Australia Pty Ltd appointed Cassowary Coast agency Andersons Real Estate for the sale of some 500 acres in Mission Beach.
The Form 6 appointment, provided that it was a “continuing appointment” commencing on for an “open listing” at a list price of $12 million at an agreed of 4.4% of the sale price.
Grahame Anderson was the agency’s sales manager and his wife its sole director.
The property had local authority approval for subdivision, an 18-hole golf course and resort accommodation.
Anderson was approached by Victor Soh who said he had “international buyers” who would be interested in the property.
In May 2019, Soh, Anderson and Sunshine entered into a deed agreeing to a success fee of $500,000 plus GST being payable on the settlement of a sale at $6.5 million plus GST.
Although the deed referred to a form 6 being attached, no form 6 was attached to the signed agreement.
A form 6 was prepared later that month for a “single appointment” for an exclusive agency expiring at the end of July and thereafter continuing as an open listing.
It provided for 4.4% commission for a sale price up to and including $6.3 million plus GST and if the sale price exceeded that sum, the agency was to be paid the entire excess plus GST.
The form 6 appointment included the standard condition that commission was payable even if the sale contract was terminated.
A contract was signed up with the Mayfair 101 group in August 2019 at $7.5 million with settlement 90 days after satisfaction of due diligence.
In May 2020 the buyer’s solicitor requested a rescission so a new contract could be entered into on the same terms with a related entity as buyer.
Although that contract envisaged an immediate settlement, that did not occur and Mayfair’s $750,000 deposit in the agency’s trust account was claimed by the seller.
Anderson Real Estate claimed the full $1.65 million on account of commission worked out as per the May 2019 appointment and when Sunshine refused to pay, filed a lawsuit in the Supreme Court in Brisbane.
Sunshine counterclaimed to recover the deposit in its trust account alleging – among other things – that the commission was not payable because the sale occurred after the term of the exclusive agency had expired.
Chief Justice Helen Bowskill ruled otherwise, concluding the sale had occurred within the period envisaged by the May 2019 form 6 because it was signed up during the open listing that followed after the exclusive agency term.
She also ruled that the failure to state in the appointment that commission would be calculated by reference to the “actual” sale price was immaterial.
The appointment complied – she ruled – with the relevant sections of the Property Occupations Act because it was clear that it would only be payable by reference to the price for which the property was agreed to be sold, not the advertised or listed price.
That conclusion was upheld on appeal.
“There was no error in the primary judge’s conclusion that the omission of the word ‘actual’ before ‘sale price’ rendered the form 6 to be of no legal effect,” held Justice David Boddice with whom Justices Burn and Ryan concurred. “The words ‘sale price’ in the form 6 [refer] to the price for which the property was agreed to be sold, which, for the purposes of the section, is the actual sale price”.
The appeal judges also upheld the chief justice’s finding that the agency had been the effective cause of the sale – rather than Anderson personally because it had been the party appointed under the relevant form 6.
Sunshine also contended the May 2019 form 6 should be read as part of a wider transaction that involved the deed entered into a few weeks earlier that envisaged commission would be payable only in the event a sale proceeded to settlement.
The trial judge and the appeal judges rejected that argument.
In their views, the May 2019 form 6 appointment was to be read alone, thus entitling the agent to commission even if the sale didn’t settle and to the lavish commission that had been agreed.
“The factual circumstances did not support a conclusion that the plain terms of the subsequent Form 6, as to payment of commission on a specified basis and in specified circumstances, including in the event of commission being payable even though the relevant sale did not proceed to settlement, was to be read down,” ruled the appeal judges.
Not only does Andersons get to keep the $750,000 deposit but Sunshine must pay it a further $900,000 plus its legal costs of the trial and appeal!
<a href="https://www.sclqld.org.au/caselaw/QCA/2023/214" target="_blank" rel="noopener">Sunshine Group Australia Pty Ltd v Trappando Pty Ltd [2023] QCA 214 Boddice JA and Burns and Ryan JJ, 3 November 2023</a>
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<title>Salt lamp business interest sale tangled in state ACL twist</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/salt-lamp-business-interest-sale-tangled-in-state-acl-twist/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Mon, 06 Nov 2023 11:36:42 +0000</pubDate>
<category><![CDATA[Busines sales]]></category>
<category><![CDATA[Misleading conduct]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20284</guid>
<description><![CDATA[The Australian Consumer Law scheduled to the federal Competition and Consumer Act applies to corporations engaged in trade or commerce. The Australian Consumer Law (Queensland) adopts the federal Act and applies it to non-corporations engaged in trade or commerce by operation of the state’s Fair Trading Act. Similar laws in other states likewise apply the […]]]></description>
<content:encoded><![CDATA[The Australian Consumer Law scheduled to the federal Competition and Consumer Act applies to corporations engaged in trade or commerce.
The Australian Consumer Law (Queensland) adopts the federal Act and applies it to non-corporations engaged in trade or commerce by operation of the state’s Fair Trading Act. Similar laws in other states likewise apply the federal Act.
<img data-dominant-color="8f887e" data-has-transparency="false" style="--dominant-color: #8f887e;" loading="lazy" decoding="async" class="not-transparent alignleft wp-image-20297 size-medium" title="Salt lamp business interest sale tangled in state ACL twist" src="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1224975723-300x200.webp" alt="" width="300" height="200" srcset="https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1224975723-300x200.webp 300w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1224975723-1024x683.webp 1024w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1224975723-768x512.webp 768w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1224975723-1536x1025.webp 1536w, https://qldbusinesspropertylawyers.com.au/wp-content/uploads/iStock-1224975723-2048x1367.webp 2048w" sizes="(max-width: 300px) 100vw, 300px" />What hasn’t been adopted in Queensland and other states are the various qualifications that apply to the federal ACL that are buried in the Competition and Consumer Act.
The significance of absence of CCA qualifiers was recently demonstrated in a dispute relating to a business interest sale where it was alleged that individuals had engaged in misleading and deceptive conduct.
Zhiren Li and Baotong Liu signed up in September 2016 for the purchase an interest in Forever Exotic – an online and pop-up retailer of natural skin, health and home products including a large variety of Himalayan salt lamps – from Zoe Mikkelsen.
Ms Liu had been attracted to the business because the salt lamps her daughter Scarlett had acquired from it proved successful in treating her hay fever symptoms.
Mikkelsen’s husband Jan proposed the incorporation of a business of the same name with Li and Liu being issued 36 of the 100 shares in the company in exchange for $630,000.
That share issue valued the business at $1.75 mil.
Jan Mikkelsen claimed – according to the buyers – that the business had consistently achieved a net profit margin of approximately 30% and that for FY 2016, profit was approximately $400,000.
A “profit and loss cash statement” said to contain “unadulterated figures from last year” and showing a net profit of $392k on revenue of $1.4 mil was provided by Jan to Scarlett who passed it on to the buyers.
Li and Liu inked the share sale agreement Scarlett translated for them without seeking independent accounting advice.
They also contributed $60,000 by way of working capital to help fund a proposed expansion into Asia.
The business did not perform as the buyers claim they were led to believe it would.
They sued the Mikkelsens for having engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive in trade or commerce and alternatively, for negligent misstatement.
The Mikkelsens defended the claims on the basis that several other financial documents – depicting lower turnover and profit – had been produced to the buyers before they signed up to the deal.
BAS statements for example showed turnover reduced by 50% and profit reduced by about 25%.
Business Valuation Specialist, Victoria Wheeler assessed the actual FY 2016 net profit of the business at just $23,000, 4.61% of turnover and testified that in most prior years it had sustained a loss.
Jan Mikkelsen argued that another $100,000 of cash sales not recorded on their “official books” should be added to those figures.
The trial judge accepted the plaintiff’s account of the profit percent representations they had relied on that had been made by Jan and that the actuals were far lower.
He also ruled that although Mr Mikkelsen was not himself or herself engaged in trade or commerce, the statements in the financial documents he provided were made “in trade or commerce” because they were designed to encourage others to invest in the trading entity.
The trial judge concluded that the buyers would not have proceeded with the investment had the defendants not made the representations and ordered Zoe Mikkelsen pay compensation pursuant to ACL s 236.
The sum they were directed to repay was the $630,000.00 purchase price discounted by 15% by reason of s137B of the CCA to account for their contributory negligence in having failed to engage an expert accountant for due diligence.
The defendants must refund the sum of $535,500.00 (plus interest) to the plaintiffs with costs.
Both parties appealed.
The Victorian Court of Appeal rejected the Mikkelsens’ arguments that the buyer had not relied on the inflated and erroneous profit representations.
It upheld the buyers’ contention that the case should have been decided under the Australian Consumer Law (Vic) because the parties who engaged in the misleading and deceptive conduct – Mr and Mrs Mikkelsen – were natural persons.
It followed that CCA 137B could not apply because there no equivalent in state ACL Acts.
Thus the contributory negligence deduction to the s 236 damages was reversed and the Mikkelsens were ordered to pay the buyers the total $630,00 investment.
<a href="https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSCA/2023/255.html" target="_blank" rel="noopener">Mikkelsen v Li [2023] VSCA 255 Ferguson CJ, Beach and McLeish JJA, 26 October 2023 </a>
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<title>Misleading financials: cheating the ATO or deceiving his buyers?</title>
<link>https://qldbusinesspropertylawyers.com.au/blog/misleading-financials-cheating-the-ato-or-deceiving-his-buyers/</link>
<dc:creator><![CDATA[Peter Carter]]></dc:creator>
<pubDate>Thu, 21 Sep 2023 22:20:36 +0000</pubDate>
<category><![CDATA[Busines sales]]></category>
<category><![CDATA[Misleading conduct]]></category>
<guid isPermaLink="false">https://qldbusinesspropertylawyers.com.au/?p=20261</guid>
<description><![CDATA[A business owner who provided potential buyers with impressive financial accounts that differed from the loss-making figures he had filed with the ATO has been ordered to refund the purchaser $2,150,000 of the buy price as a consequence of the misleading financials. In early 2018 Bing Hu and Cindy Qiu were investigating the potential purchase […]]]></description>
<content:encoded><![CDATA[A business owner who provided potential buyers with impressive financial accounts that differed from the loss-making figures he had filed with the ATO has been ordered to refund the purchaser $2,150,000 of the buy price as a consequence of the misleading financials.
In early 2018 Bing Hu and Cindy Qiu were investigating the potential purchase of the café business at Melbourne’s Royal Children’s Hospital that was on the market for sale for $2.5 million.
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They received financial statements from the seller recording annual profits of $502k in 2016 and $542k in 2017 and a projected profit of $530k for 2018.
John Zhang of seller Melbourne Café Pty Ltd was firm on his price but agreed to sell the business in April 2018 to Hu and Qiu’s company H & Q Café Pty Ltd, for $2.4 million.
Settlement occurred in November 2018 with the purchaser funding the buy with a loan from CBA bank.
In February 2019, Qiu discovered “hidden” records on a computer that had been acquired as part of the sale indicating losses of $174k and $265k for 2016 and 2017 and a projected profit for the 2018 year of around $150,000.
The “hidden” records – which had never been disclosed to the buyer – were consistent with the information provided by the Seller to be ATO.
The business traded poorly and in December 2019 when it was put up for sale through a broker, the only purchase offer received was at $250,000.
H & Q commenced proceedings in the Victorian County Court seeking a refund of the purchase price for the business, together with lost profits, trading losses and interest on the CBA loan.
It argued that had it been informed of the true financial position of the business, it would not have entered into the deal.
Zhang unsuccessfully contended that the “represented” financials depicted the correct financial position of the business and that the lodged tax returns for 2016 and 2017 were inaccurate.
He was found to have destroyed documents relevant to the business’ performance pre-acquisition and to have otherwise behaved deceitfully.
Zhang ultimately accepted in cross-examination the falsity of the information provided to the buyer.
The trial judge also took Ms Qiu to be an untruthful and unreliable witnesses. H & Q had concealed the poor trading performance from the CBA – in fear of its reaction – and supplied them with false information indicating a net profit of $175k for the period October 2018 to June 2019.
Against that background, the judge was required to assess what damage the buyer had suffered.
H&Q relied on expert evidence from CFAS chartered accountant Michael Smith who arrived at a value as at the date of sale – based on the “represented” misleading financials – of between $1.75 and $2 million. Victoria Wheeler of Munday Wilkinson – for Zhang arrived at a range between $2.28 and $2.57 million.
Smith valued the business on the “hidden” financials at the date of sale at nil. He also returned a nil value based on post- acquisition trading and an operating loss during H&Q’s tenure of $623k.
Wheeler was not asked to provide a figure based on the “hidden” financials but her value for the café business post- acquisition came in at between $92,000 and $103,500 with an operating loss over the period of $401k.
The judge was not convinced that the losses were attributable to the seller’s misleading representations.
“There seems to be a myriad of reasons why the business was not operating as successfully as it had been hoped.
Based on the same observations, she ruled there was insufficient evidence to assess true value of the business as at the date of acquisition. She therefore awarded only nominal damages for the buyer’s reliance on the misleading financials.
On appeal, the court did not disturb the judge’s conclusions as to Qiu’ lack of credibility as they were “neither glaringly improbable nor contrary to compelling inferences”.
It noted that Zhang’s evidence was “breathtakingly disingenuous”.
“One is left with the distinct impression after reading the transcript that he would say anything regardless of its veracity if he perceived that it improved his position,” the court’s judgment reads. “To the ATO in 2017 the business was a loser; to the prospective purchaser it was a winner. His evidence was in exactly that vein”.
Neither did they disturb the nil damages ruling in relation to operational losses since acquisition, holding that the trial judge was entitled to have concluded that those losses could have arisen for a “myriad of reasons”.
The position in respect of loss on the purchase of the business was though – they ruled – “considerably different”.
They had no hesitation in deciding that the true value of the business at the time that it was purchased by H & Q was either nil – based on accountant Smith’s evidence which ought to have been accepted – or $250,000 (based on the offer to purchase the business).
“Doing the best it could on the evidence adduced at trial”, the court – in adopting “a common sense approach” – the value of the business at the time of acquisition was $250,000.
The appeal judges assessed damages at $2,150,000, being the difference between that sum and the purchase price.
<a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSCA/2023/200.html?context=1;query=H%20&%20Q;mask_path=au/cases/vic/VSCA" target="_blank" rel="noopener">H & Q Cafe Pty Ltd v Melbourne Cafe Pty Ltd & Anor [2023] VSCA 200 Niall, Kennedy JJA and J Forrest AJA, 25 August 2023</a>
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