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.
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.
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