GFC

A seasoned civil works contractor keen to develop a major Lockyer Valley subdivision enlisted the support of an enthusiastic private lender.

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One would have thought that all the stories of GFC related property calamities in Queensland had been told

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A developer who defaulted on the purchase of a $25m condominium project at the historic Albion Flour Mill site has been ordered to pay the vendor millions in compensation for the collapsed deal.

Fridcorp Group – operated by developers Paul Fridman and Chris Roche – signed up to buy the 12 lot FKP site in July 2015.

The company’s $400m “Odyssey” development was to consist of two 20-storey buildings totalling 634 residential units.

Council approval was received in August 2016, but in December the deal was pulled.

Fridcorp alleged FKP failed to disclose all required information, which, by their claim, breached statutory environmental protection rules.

But all necessary reports were available via a virtual “data room” that both parties had access to prior to signing the contract.

FKP sued in Brisbane’s Supreme Court for the difference between the sale price and the site’s diminished value as at the due date for settlement.

Justice David Jackson had no difficulty in ruling that notice had been duly given, because Fridcorp had specifically consented to documents being disclosed by way of the mutually accessible “data room”.

Justice Jackson said the use of the online platform satisfied all legal requirements and dismissed Fridcorp’s attempts to justify its withdrawal from the deal.

It was irrelevant, he reasoned, that the requisite contamination notice was one of scores of documents deposited into the data room because it was clearly titled and easily available.

Valuer Troy Linnane, head of residential development at Jones Lang LaSalle, argued by comparison with other developments in Bowen Hills and Newstead that the site’s value in December 2016 had dropped from $25m to $17m.

He then reasoned that by March 2017 the value had collapsed further to $15.75m.

Justice Jackson thought that to be too much of a stretch as such a conclusion was “unsatisfactory” and “inconsistent”.

There were also unresolved questions as to why the valuer rated an inferior comparison site at a far higher dollar rate per square metre than the Albion Mills site.

That said, the value drop to $17m was taken as reasonable conclusion, yielding a value collapse over just 18 months of $8m or 32%.

Given that a deposit of $2.75m had already been paid, the Fridcorp Group was ordered to pay $5.25m plus interest – a total of $5.46m – for what was ruled to be a serious contract breach.

For more details on the case, visit:

FKP Commercial Developments Pty Ltd v Albion Mill FCP Pty Ltd & Anor [2017] QSC 322

The former directors of a food-service business who sold down their shares to a new operator have been sued for the buyer’s rent arrears under a personal guarantee they signed 20 years earlier in favour of the property’s former owner.

Anthony Rich acquired the Rocklea warehouse from West Pacific Properties in July 1998. Just two weeks earlier the vendors had granted a seven-year lease with a three-year option to Comet Foods, secured by guarantees from directors David and Maria Ridout.

The company’s option expiring in July 2008 was not validly exercised but it nevertheless remained in occupation.

The Ridouts sold their shares in the restaurant supplier and resigned their directorships in January 2008, thereby severing all connection is with Comet.

Rather than commit to a new long term lease, in June that year the new shareholders negotiated a monthly tenancy for the Abercrombie St facility that could be terminated on 3 months’ notice.

In exchange for that flexibility, they agreed to a rent increase of 15%.

With the onset of the GFC, the company went into arrears to the extent of $92k. It was wound up November 2011.

Rich made a demand on the Ridouts for the debt under their ancient guarantee, to which they naturally enough took exception.

The dispute eventually arrived in the District Court in Brisbane on appeal from a Magistrates Court decision that had ruled in favour of the landlord and ordered the guarantors to pay all the arrears plus $38k in interest.

Judge David Andrews had to rule on the reach of the guarantee which was expressed to operate in respect of monies that became payable during the term or any “renewal, extension or holding over” under the lease.

The parties were taken to have conceded – despite protests from the guarantors on the appeal – that the guarantee covenants “touch and concern the land” such that Rich was taken to have received their benefit on transfer of the reversion to him.

That said, Comet’s occupation after the option period expired and new ownership was in place – when the arrears were incurred – was, Judge Andrews concluded, of a different character to that under the lease and option period.

That debt arose from obligations that were different – a monthly tenancy with “more onerous rent” – to those in the lease to which the guarantee related, he decided.

But what of the “all monies” provision in the guarantee that purported to extend to “any monies whatsoever payable as between the Lessor and the Lessee”?

The court reasoned that the particular provision had to be construed as meaning “other monies” that “were within the contemplation of the original lessors and the guarantors when the guarantee was executed”.

“Strictly construed” – ie on a contra proferentem basis – no intent could be assumed on the part of the guarantors to “accept prejudicial changes to the terms” created as a result of the 2008 monthly tenancy.

The situation would have been different – noted his honour – had the guarantee referred to an obligation on the part of the guarantor continuing after the term “while the lessor continued to be a tenant or otherwise continued in possession or occupation” rather than restricting the obligation to “this lease”.

 Ridout & Anor v Rich [2017] QDC 129 Andrews SC DCJ 8 May 2017

An agency appointed for the exclusive marketing of a suburban high-rise into its predominantly Chinese clientele has received an average 14% commission on the sales.

The May 2012 terms allowed the developer to compel Property Investors Alliance to buy all 16 one-bedroom units within 30 days of registration of the community title plan at a total base price of $7.2 million.

PIA was entitled to introduce buyers for the units under construction in Ryde (Sydney) at higher prices and to keep the excess.

The base price was negotiated so as to yield the agent an anticipated 5% or so on each sale.

The arrangement was crafted as an exclusive agency coupled with put options in favour of developer, an arrangement which doesn’t attract stamp duty in the way a put and call option, under NSW law, does.

As well as locating a suitable property for them, PIA’s service to clients included finance assistance, a three year rent guarantee, a pre-completion inspection service, and ensuring defect rectification.

In November 2013 it entered into an almost identical agreement to market a further 51 units in the project – including 40 two bedders – under which PIA was obliged to return to the developer $31.4 million.

That arrangement was long in the making, with PIA’s Justin Wang initially reluctant. Sales had been slow. Wang had only been unable to move a single one bedroom model in the two years up to April 2014. He and developer Diaa Gabra were both unsure as to an appropriate “base price” for the two-bedroom version, settling at just above $600k for most.

In late 2013 Wang also secured an exclusive agency to sell the entire stock of another development in the same street, almost directly opposite. The “hot” market for the sale of units in that building – The Row – suggested Wang would be able to “ask more [Mr Gabra’s] units than he had anticipated”.

Wang sold out all but three of Gabra’s apartments under the November 2013 arrangement at about $60,000 above the developer’s base price and at least $100,000 above, for those in the first deal.

Gabra was stunned when he began receiving sales advices from PIA in March 2014. He called on Wang to adjust the base prices upwards which Wang refused to do.

The developer refused to settle on 3 of the sales whose initial buyers had rescinded but for whom Wang had introduced a replacement purchaser.

He contended that PIA as licensed real estate agent, had not complied with the relevant NSW regulations relating to its appointment and had failed to “act in the interest of his client [the developer] at all times”.

Justice Michael Ball in the NSW Supreme Court agreed that he was acting as agent for the developer but declined to intervene because the agreement was “negotiated between sophisticated and knowledgeable parties reflecting a commercial relationship in which all the risks and benefits of the sale to a third party were placed on PIA”.

“It would be unjust if PIA were entitled to obtain the benefits due to it under the contract,” he ruled.

Neither was PIA guilty of any breach of fiduciary duty or misleading conduct.

The court ordered the developer to pay over the $5.51 million together with additional surpluses due under the 3 contracts that he had refused to complete, namely $431k – making up a total payment of $5.5 million and an average “commission” rate of 14% – together with interest and legal costs.

Ryde Developments Pty Ltd v The Property Investors Alliance Pty Ltd (No 4) [2017] NSWSC 436 Ball J 21 April 2017

Ray White Commercial has been ordered to pay a Queensland investor the deficiency in value of a commercial property resulting from an ambiguity in its Information Memorandum.

The agency’s David Djurovitch sent the IM to investor Brian Makings in August 2009 and shortly after contacted him to advise the retail centre at Robina had been passed in at auction at $6.7 million.

The “overly trusting and naive” buyer was attracted to the Piazza centre by its “Total Net Rent” return of $607k. That attraction intensified when told by Djurovitch that a forthcoming rent review would escalate the “net rent” figure.

At their next meeting, the agent “did quick calculation” to show that on the existing rent, a 9% yield – that the buyer was seeking – would “would give you a purchase price of $6.9 million”.

Makings agreed on the spot to buy at that price and signed a draft contract with no due diligence clause.

What he never understood was that the net return quotes represented rents the tenants were obliged to pay under their leases, not sums the owner had banked.

The true state of affairs was that all tenants were struggling, the centre manager was incompetent and “the tenants could not have borne the impost” of paying full rent and outgoings.

The actual rental received was just $298k. Recoverable outgoings had also been overestimated to the extent of 100%.

It didn’t take long for Mr Makings to realise he had been sold a pup. With the former owner now in liquidation, his anger was focused on the centre manager who he named as first defendant in his Supreme Court lawsuit.

For its part, the agency pleaded innocent, having only passed on data it had received from CBRE. It also sought to be indemnified by the directors of the former owner who it brought into the proceedings as third parties.

Ray White’s Greg Bell contended Makings was himself responsible for having failed to “employ an accountant to look at the actual financials”.

But even had the buyer requested the financials, CBRE – perhaps because of the “serious flaws in the management of the Piazza – would, according to Justice Jean Dalton, have been unlikely to have granted access.

Ray White also pointed to the IM provision that absolved itself of responsibility for the accuracy of its contents and a warning that intending buyers should rely on their own enquiries.

Makings denied having read it, but in Justice Dalton’s view, even had he done so, the warning was entirely ineffective “to alert a reasonable person in Mr Makings’ position”.

The agency could not disclaim responsibility in that way, for information that it “branded prominently and repeatedly as having been prepared by Ray White Commercial” and “put forward as its own”.

The “net rent” statements were at the very least misleading and – so ruled Justice Dalton – Ray White was liable to the buyer as a consequence.

Both parties called experts who had attributed a valuation to the centre, Makings case being that he was entitled to the shortfall as compensation.

The court preferred the evidence of Lisa Murdoch from Jones Lang Lasalle who “presented a very impressive series of reports” and was “very impressive” over that of her colleague who “made false representations in his curriculum vitae”.

Murdoch valued the Piazza as at the date of settlement of the contract in September 2009 at $4.91 million – yielding a loss of $1.99 million and at 6%, a much lower rent return than the buyer’s target yield – for which Ray White was held liable .

What about CBRE?

Notwithstanding the serious errors made by CBRE, it had produced a further tenancy schedule as part of an Owner’s Statement in June 2009 that “taken as a whole showed how poorly the Piazza was performing”.

It could not have “reasonably anticipated” – concluded the judge – that only part of that document would be provided to the buyer by Whites. Thus CBRE was not liable for the buyer’s loss.

Neither were the directors of the seller company liable. “It could only be in the most extraordinary circumstances” – which were not made out – “that directors could owe a duty of care either to Ray White or to the plaintiff”.

Makings Custodian Pty Ltd v CBRE (C) Pty Ltd [2017] QSC 080 Dalton J 19 May 2017

Gold Coast hair salon owner Michelle Glynn has been forced to sell her Varsity Lakes home following the collapse of an unusual arrangement for its rental.

In September 2013 she was influenced by an acquaintance Doug Wroe to grant a lease of the home to a company owned by Malcolm Brown and in turn enter into a similar arrangement to lease a nearby home owned by Wroe .

In both cases the 5 year leases included a “call option agreement” that granted the tenant an option to buy the rented property at any time during the period at an agreed figure with “equity credits” being accrued along the way for a portion of the $2.5k/ month rent installments.

The grant of the options entailed a payment of a $20k option fee which became the deposit under the contract if the option was exercised.

In the case of the property Glynn was selling, Brown’s company was entitled to construct an extension to the home, which he did.

The arrangement worked well until about March 2015 until Glynn and Wroe had differences regarding the property Glynn was renting from Wroe and over which she had an option to buy.

He obtained an order evicting her from the home as a consequence of which she lost the benefit of her call option agreement and had nowhere to live.

Brown promptly decided to exercise his company’s option to buy, by sending Glynn the appropriate paperwork.

Glynn retaliated – in the realisation that she had lost the opportunity to purchase the property from which she had been evicted and now was being forced, as she saw it, to sell hers to Brown for $399k – by purporting to terminate the option.

The dispute inevitably led to the District Court where judge David Reid was required to adjudicate.

In his view Brown’s company had properly exercised the option and Glynn’s purported termination was of no effect.

He ruled in Brown’s favour.

Settlement of the contract was ordered to be effected forthwith and Glynn is required to pay the company’s legal costs.

Glynn v Brown & Anor [2016] QDC 313 Reid DCJ 2 December 2016

A local couple has failed in their bid to have the Property Agents Fidelity Fund reimburse them over the loss of money paid to a local agent intended to be used to snap up distressed US real estate at the height of the Global Financial Crisis.

Ian and Pamela Mann gave the funds to Alistair McCreath who held financial planning and real estate licences and traded as FBC Realty in Maroochydore.

Documents were presented to them for signing in September 2010, setting out particulars of the properties and the purchase price payable in US dollars for each.

They provided that the sale would be “closed within 10 days after all necessary documents are ready and the transaction has been fully funded”.

The contract documents were accompanied by a photograph of the property and an estimated market value supported by comparative valuation of similar homes.

According to the Queensland Civil and Administrative Tribunal – in determining the Manns’ application for payment from the Fidelity Fund – the only conclusion open as to the identity of the seller in each case was that it was in fact FBC Realty itself.

This was confirmed by Ian Mann who told the tribunal that he assumed McCreath had purchased the properties, refurbished them and then sold to investors.

Upon the Manns obtaining finance for the acquisitions, the funds were requested to be paid into McCreath’s business account rather than in his trust account.

McCreath later explained that resulted from a clerical error.

The acquisitions did not go ahead and despite demands for their repayment, the funds were never repaid.

Concluding that McCreath was acting in the capacity of seller rather than as agent, senior QCAT member Jeremy Gordon reasoned that the loss did not occur as a result of any “stealing, misappropriation or misapplication” by any real estate agent.

Ruling that the Fidelity Fund has no application where real estate licensees conduct their own business dealings, he rejected the claim against the fund.

FBC and McCreath faced prosecution over their conduct in 2013. Aroiund the same time McCreath was banned from giving financial advice for nine months.

The Manns also pursued bankruptcy proceedings against him.

Mann & Mann v McCreath [2016] QCAT 477 Member Gordon 27 October 2016

A $4 million deal for the sale of a Cape Tribulation resort was as exotic as its location is spectacular. An 8 acre oasis in the World Heritage listed Daintree Rainforest, PK’s Jungle Village consists of four lots housing a hotel restaurant & bar, manager’s residence, supermarket, bathroom & shower facilities and a camping ground.

Seller Mark Biancotti agreed to the deal in exchange for two Gold Coast properties booked at $250k each, a $1.5 million boat and $2 million in cash.

All contracts – including the sale of the budget resort business – were to complete contemporaneously in May 2014.

When that didn’t happen the arrangement became even more complicated.

A “partial” settlement occurred in June 2014 when on signing over the Gold Coast properties and the 72’ Hershine motor cruiser to Biancotti, buyers Mark Seabrook and David Brucesmith took over the resort and became responsible for expenses, including the seller’s monthly mortgage.

The rejig required the buyers to stump up with another $625k – for which finance approval was imminent – within 30 days in exchange for unencumbered title to all but the “resort” land. The final $1.375 mil was deferred until July 2015.

When finance didn’t materialise, Biancotti agreed to keep the contracts on foot on the basis that the outstanding $625k was accruing 12% p.a. interest.

With suitable financiers to support the deal still to be found in early 2015, proposals were floated for the seller to retain the resort or for them to join together to sell the entire operation to a third-party. Neither idea was pursued and the buyers continued to source finance.

The supermarket at the complex presented another complication.

At contract time the tenant was month to month. But in March 2015 Biancotti granted Graham Williams a 5 year lease at the same $5k/month rent. Williams also agreed to take a 5 year lease of the adjoining vacant shop on a similar rental.

The buyers were aware of the leases but claimed to have had no knowledge of amendments agreed in February 2016, just prior to them being lodged for registration in anticipation of the final settlement that had been extended again to the following month.

Seabrook and Brucesmith refused to settle unless they were credited with a discount represented by the potential loss of rent on the second premises arising from a three months’ break lease provision and a 50% rent discount.

That they claimed represented $216k that should be deducted from the buy price under the contract.

After a two day trial in Brisbane’s Supreme Court, Justice Peter Flanagan rejected the contention that Seabrook and Brucesmith were unaware of the concessions that the supermarket tenant had demanded.

Williams swore that they had initiated the idea he sign leases at a higher rent to assist their financing “with a side agreement reflecting the actual deal” at $2k/month for the former pharmacy and a 3 month termination right.

“The success of my business, was dependent on these success of the resort,” Williams said in explanation for his insistence on the early termination right.

Justice Flanagan preferred him – “a forthright and credible witness” – over Seabrook whose testimony was “self-serving and disingenuous” in his view.

Seabrook’s account was also inconsistent with documents– so said the court – that revealed a clear intention to offer a side deed at a lower rent with a break lease option, “to help with finance”.

The court took the view that he had ultimately left it Biancotti and Williams to document the arrangement.

“The mere fact that settlement was delayed does not affect the authorisation given by Mr Seabrook to Mr Biancotti,” ruled Justice Flanagan.

The buyers’ claim for specific performance of the contract at the reduced price of $1.617 million was dismissed.

Whether or not the final settlement has occurred with the buyers paying over the full balance of $1.978 million the court ruled was due, remains unclear.

MSD Securities Pty Ltd & Ors v MFB Properties (NQ) Pty Ltd & Ors  [2017] 2 QLR Flanagan J 15 November 2016

Although there has been a substantial recovery in Gold Coast property from the depths of the GFC, credit crisis related property collapses are still winding their way through the courts.

Consider the story of Currumbin developer Daniel Schwerdtfeger who secured $16.46 million in Westpac finance in July 2008 – less than 6 weeks before the collapse of US bank Lehman Bros sent worldwide property and equity markets into deep recession from which it is still recovering.

The first tranche of $8.58 million was for construction of two projects at Currumbin and the second for a $13 mil land subdivision known as “Double D” in Currumbin Valley .

Double D was the “jewel in the crown” – a “highly saleable” 10 lot project – about which the protagonists and several Westpac business development managers were “very excited”.

In the minds of Schwerdtfeger and wife Laura Aprile, although only half of the funding was directed towards Double D, it was from that venture that repayment of the entire loan could be assured.

Neither expressed alarm when the loan documents referred only to a 12 month period and development approval was specified as a pre-condition of the Double D advance.

They signed the requisite all monies guarantee to permit the initial $8.58 million advance to be drawn by their company Doxa.

Changed economic conditions and delays with council meant that the Double D drawdown was never requested. It would have been impossible to draw it, complete the project, sell the stock and repay the loan before the July 2009 expiration date.

A formal variation was signed up in August 2009 to extend the loan for a further 12 months on condition an immediate $600k capital reduction and a further $600k payment to cover interest over the additional period, were made.

Variations to the guarantees reflecting the new arrangements were prepared by Westpac and signed by Schwerdtfeger and Aprile.

The property market was still sinking and not unexpectedly,  Doxa could not make the $600k pay down. As much to protect its own position as it was to demonstrate some degree of flexibility, a further variation was documented in February 2010.

But by May, Westpac formally demanded repayment in full as a result of ongoing default.

In August 2010, the amount said to be owing was $9.2 mil inclusive of interest and by February 2014 – Doxa having gone into liquidation the previous July – the total arrears had escalated to $13.2 million.

The pair defended Westpac’s recovery action in Brisbane’s Supreme Court.

Because Doxa’s capacity to repay had been fundamentally impaired by the cancellation of the Double D bank loan – they argued – they were relieved of their obligations under the guarantee as a matter of law.

Justice Roslyn Atkinson decided however that the rule relating to discharge of sureties could not apply in this instance as by executing the guarantee variations, the guarantors had consented to the change.

Considering the guarantors’ contention that they had acted in reliance on Westpac’s binding representation to fund Double D, she observed that “no credible evidence” was offered in support of that claim.

The best they were able to demonstrate was that Westpac personnel “expressed enthusiasm for the idea of developing the Double D property,” she concluded.

Schwerdtfeger and Aprile were ordered to repay the bank the amount limited by their guarantee namely $8.58 million and pay the bank’s costs of the proceedings.

Westpac Banking Corporation v Schwerdtfeger & Anor [2016] QSC 173 Atkinson J 04/08/2016