03 Dec 2004

Buy high, sell low, and argue about the loss

An asset is bought upon negligent advice, but the buyer is unaware that the price is too high and the asset's value is in freefall. Following a recent High Court decision, the buyer can recover damages not only for the loss of purchase price when compared to "real or fair value" of the property at the time of purchase, but also the consequent loss in a falling market.

As a result of the decision in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54 (12 November 2004), negligent valuation has become a more costly error. The decision however leaves some questions on loss unanswered.

The failed investment

A Brisbane couple, the Fosters, relocated to Mackay and began looking for an investment property which would be bought by them through their vehicle Astonland Pty Ltd . In nearby Sarina there was a shopping arcade called the Plaza. Not knowing much about the local market, they asked Mr Deacon from HTW Valuers (Central Qld) Pty Ltd for advice. Specifically, he was given the Plaza rentals and asked about

  • rental levels for retail shops in Sarina, because they needed to know whether the Plaza rentals were right and how they fitted into the Sarina market generally; and
  • the demand in Sarina for retail tenancies and the availability of tenants.

In April 1997 Mr Deacon provided his advice, saying that the current rental levels were maintainable, and some were at the lower end of the market range. Mr Deacon was aware that a new shopping mall was being built near the Plaza, but did not think it was likely to affect the Plaza rentals adversely. His belief was honest but wrong; and his advice should have warned the Fosters that the effect of the new shopping mall on rentals was uncertain. The trial judge held that his failure to qualify his opinion breached his duties to the Fosters arising from the contract under which the Fosters paid for the advice, and negligence law, and also breached section 52 of the Trade Practices Act's prohibition on misleading and deceptive conduct.

Without Mr Deacon's advice, Astonland would not have entered into a contract to buy the Plaza for $485,000 on 28 April 1997. The sale was completed on 1 July 1997.

What was the Plaza really worth?

The new shopping centre caused a collapse in the Plaza's value:

  • in April 1997 (ie. when the Fosters decided to buy) it was only worth $400,000
  • at completion in July 1997 it had fallen to $375,000
  • by March 2000 it was $130,000.

The Fosters obviously had lost money - but how much? Was it

  • $85,000 (the difference between the purchase price and value in April 1997)
  • $110, 000 (the difference between the purchase price and value at completion in July 1997); or
  • $355,000 (the difference between the purchase price and latest value)?

Correct approach to valuing the loss

From the moment it contracted to buy the Plaza, Astonland suffered a loss. The central question in the High Court was whether that loss was the only loss that Astonland and the Fosters could recover.

The common approach, sometimes described as the rule in Potts v Miller, is to subtract value from price. The High Court pointed out that:

  • "value" here doesn’t mean "market value" - it refers to the "real" or "fair" or "intrinsic" value
  • the real value is to be assessed in the light of subsequent events because they may show that the price paid was not the true value
  • market values - the prices actually obtainable in market sales - may be disregarded if they are "delusive or fictitious"
  • valuation is fundamentally different to the task of assessing loss because valuation is to be conducted without the benefit of hindsight, but the latter is to be conducted with hindsight
  • when determining the real value at the time of purchase, a court must be careful in how it deals with looking at the possible causes of the decline in value. Causes inherent to the asset should be taken into account, but not causes that are "independent", "extrinsic", "supervening" or "accidental".

Applying these principles, the High Court started with the decline in the Plaza's value, which was caused by something inherent in the Plaza in 1997 - the building, and the impending opening, of the new shopping centre nearby.

Astonland had suffered a loss in April 1997 in that, had it sued and gone to court at that time, it could have proved a loss of at least $85,000. With the benefit of hindsight operating from the time of the trial in 2001, however, it can be seen that its ultimate loss was much greater.

In assessing damages in this case, the court was not limited to the assessment of the risk of loss as at 28 April 1997, but was entitled to take account of how those risks had evolved into certainties at dates after the date on which the comparison of price and true value was being made. The market value in 1997 was not a "true value".

The trial judge found that the "true value" of the land was around $130,000 on 28 April 1997. While there was no direct evidence of this, there does not have to be, and indirect evidence could be found in the market values at the later dates. The assessment of damages based on an estimate of true value is not an exact process, and it's possible that the Plaza was not truly worth as little as $130,000. Even so, the trial judge's overall assessment of damages was not unjust because he was excessively generous to the defendant in other aspects of assessing damages, so the High Court left the damages award undisturbed.

What we still don't know

Since the defendant did not challenge the finding of liability or the bases for damages, the High Court didn’t have to consider several important questions:

  • Can a plaintiff sue for damages under section 82 of the Trade Practices Act for a breach of section 52 constituted by failure to perform a contract? It might be that a breach of contract doesn’t breach the Act where the breach is based on the failure by a professional adviser who has made representations about future matters (for example, rental levels) to qualify the representations by a statement about their uncertainty.
  • Are damages for causes of action in contract, tort and for damages for breach of section 52 always identical?
  • Should damages be assessed as at the date the contract was entered into or the date the purchase was completed (1 July 1997)? The defendant advocated the former which the HCA said was "the more orthodox" but the difference did not matter in this case.
  • What are the damages when a plaintiff purchases a property which has been significantly over-valued (thereby suffering a loss) but which then increases in value?

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.