Federal Court of Australia

Elanor Funds Management Ltd v Alceon Group Pty Ltd [2024] FCAFC 121

ORDERS

THE COURT ORDERS THAT:

1.    The first respondent’s notice of contention be dismissed.

2.    With the exception of Ground 5, the second respondent’s notice of contention be dismissed.

3.    The appeal be allowed.

4.    Set aside the orders made on 30 October 2023 and, in their place, order:

(a)    the first respondent pay to the appellant the sum of $2,360,000, plus interest at Court rates calculated from 1 November 2017.

(b)    the second respondent pay to the appellant the sum of $590,000, plus interest at Court rates calculated from 1 November 2017.

(c)    the first and second respondents pay the appellant’s costs of the proceedings at first instance.

5.    The first and second respondents pay the appellant’s costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BROMWICH AND THAWLEY JJ:

OVERVIEW

1    This appeal raises forty-four grounds of appeal from orders made by a judge of this court, dismissing proceedings instituted by the disappointed purchaser of a shopping centre in Queensland: Elanor Funds Management Ltd v Alceon Group Pty Ltd [2023] FCA 1291 (hereafter “J”). The two respondents each rely on a notice of contention raising alternative bases for upholding various aspects of the decision of the trial judge.

2    On 1 November 2017, Elanor Funds Management Ltd purchased the Bluewater Square Shopping Centre in Redcliffe, Queensland, from Alceon Group Pty Ltd (the first respondent). CPRAM Investments Pty Ltd (the second respondent) had been appointed by Alceon on 13 December 2012, under an investment management agreement, as one of the joint managers of an unregistered management investment scheme known as the “Bluewater Trust”. Its duties included the identification of opportunities to dispose of the Centre.

3    Elanor acquired the Centre by entering into a Put and Call Option Agreement on 15 September 2017 and exercising the Call Option on 23 October 2017. This mechanism was adopted because Elanor was also purchasing the Centre for the purposes of an unregistered management investment scheme that it would market to sophisticated investors.

4    Elanor contended that, during the sale process, Alceon and CPRAM engaged in misleading or deceptive conduct, breaching s 18 of the Australian Consumer Law (ACL), being schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA). The final form of the pleadings was contained in a Further Amended Statement of Claim (FASOC).

5    By the time of closing submissions, Elanor’s case was confined to what was said to be three representations referred to as the “commencement date representation”, the “arrears representations” and the “rental return representation”. The alleged conduct of particular importance to the appeal related to nine tenants who operated in the Centre’s two restaurant precincts (referred to collectively as the Food Court Tenants) and concerned whether they were in, or had a history of, arrears in rent at the time Elanor conducted its due diligence.

6    As the trial judge noted at J[30]:

[30]    Elanor contends that the data room contained copies of … a document for each month between December 2016 and July 2017 in the form of a Tenant Arrears Report. … [A] primary contention of Elanor (opened on its case), is that the Tenant Arrears Reports “did not identify any of the [Food Court Tenants] as being in arrears for any amount” and further that no other arrears report nor any other documents were provided which recorded tenancy arrears between December 2016 and July 2017 ...

7    Elanor contended that:

(a)    it was provided with Tenant Arrears Reports in the due diligence data room which did not disclose that any of the Food Court Tenants were in, or had a history of, arrears;

(b)    when Elanor later asked CPRAM – during a tenant by tenant review on 30 August 2017 – whether there were any such arrears, it was not informed of any relevant history;

(c)    to varying degrees, a number of the Food Court Tenants did have a history of, or were in, arrears at relevant times;

(d)    if it had known the true position, Elanor would have re-calculated what it was prepared to offer to purchase the Centre by notionally excluding the tenants which it considered to be “at risk” from its calculation of anticipated income, and made other adjustments, with the result that it would not have proceeded with the offer of $55.25 million which it had made in an expression of interest on 16 August 2017; and

(e)    it either would have paid less for the Centre or, if an offer less than $55.25 million were not acceptable to Alceon, it would not have purchased the Centre.

8    Elanor agreed with the proposition put by the trial judge that, if Elanor had known the true position, it would only have been prepared to pay an amount which was less than the minimum amount which Alceon was prepared to accept, namely $55.25 million: J[1], [42]. The case was therefore conducted as a ‘no transaction’ case. Leaving relevant defences aside and assuming Elanor were otherwise successful, there was no issue that the measure of damages was the difference between the real value of the Centre and the price which was in fact paid. Elanor contended that the real value of the Centre was $49 million: J[6]. The price paid was $55.25 million, although the parties agreed that there should be an adjustment of $650,000 (related to a rental guarantee). Accordingly, Elanor claimed a loss of $5.6 million.

9    The trial judge concluded that Elanor failed to prove that: (a) Alceon or CPRAM engaged in misleading or deceptive conduct; (b) Elanor relied on that conduct; or (c) Elanor sustained any loss. The proceeding was therefore dismissed: J[8].

10    As is explained further below, the evidence established that:

(a)    Alceon and CPRAM provided Elanor and its representatives (including Mr Hamilton of CBRE Pty Ltd, providing investment advisory services to Elanor) access to a data room for the purpose of enabling Elanor to undertake a due diligence process.

(b)    Elanor examined Tenant Arrears Reports for the months December 2016 to July 2017 contained in the data room (the Data Room Arrears Reports). These were business records of the entity managing the tenancies (Savills (Qld) Pty Ltd) sourced from their electronic management system. The Data Room Arrears Reports did not reveal any of the Food Court Tenants as having arrears of rent in any month.

(c)    No other Tenant Arrears Reports, nor any other documents, were provided in the data room or otherwise which recorded arrears in respect of any of the Food Court Tenants for the period December 2016 to July 2017.

(d)    There was in fact a significant history of arrears on the part of one or more of the Food Court Tenants in every month from December 2016 to July 2017. Indeed, there were a number of Tenant Arrears Reports that existed at the time of due diligence (but which were not in the data room) that recorded rental arrears, first obtained during the trial proceedings under subpoena (the Discovered Arrears Reports).

(e)    At a meeting on 30 August 2017, CPRAM (by Mr Frenil Shah) did not identify any of the Food Court Tenants as having arrears, or a history of arrears, or any issue in respect of their respective sales, when asked questions in that respect by Elanor (through its agent, Mr Hamilton).

11    The trial judge confined his analysis essentially to the Tenant Arrears Report for July 2017 and to what was said at the meeting on 30 August 2017. The reasons why the trial judge concluded that the respondents’ conduct was not misleading or deceptive were, in summary, that, although: (i) the Tenant Arrears Report for July 2017 did not disclose that any of the Food Court Tenants were in arrears; and (ii) CPRAM failed to tell Elanor that there was in fact a history of arrears when it was asked questions in relation to each Food Court Tenant on 30 August 2017:

(a)    Elanor “assumed” the risk that the data in the data room was inaccurate and “chose not to undertake any due diligence as to the accuracy of the data contained therein”: J[235];

(b)    Elanor “assumed the accuracy” of the business records in the data room, including the Tenant Arrears Reports: J[235];

(c)    Elanor could have better investigated or audited the information which was in the data room and asked questions through a question and answer facility in order to determine that the Tenant Arrears Reports were incorrect: J[226], [238].

12    The reasons why the trial judge concluded that Elanor did not rely on the conduct were, in summary, that, although: (i) Elanor calculated its offer price for the purchase of the Centre by reference to the anticipated income to be derived from the rent; and (ii) marketed the investment to investors in the proposed managed investment scheme by reference to the anticipated return from the rental income to be derived from the Centre over a three year term:

(a)    “the arrears position of individual Food Court Tenants was not a consideration which Elanor took into account at the time”: J[264] (see also J[257]); and

(b)    “the redevelopment potential of the site was a primary motivating factor to acquire the Centre”: J[271].

13    The reason why the trial judge concluded that no loss was suffered was, in summary, that Elanor in fact got a remarkable deal: the real value of the property, on the hypothesis that there were nine “at risk” Food Court Tenants, was $58.7 million, namely $3.45 million more than the actual sale price of $55.25 million. The actual sale price was agreed, after a marketing campaign, between sophisticated investors (Elanor and Alceon) pursuing their respective commercial interests in an arm’s length transaction conducted, at least from Elanor’s perspective, on the basis that none of the Food Court Tenants were “at risk”.

14    For the reasons given below, each of the trial judge’s three reasons for dismissing Elanor’s claim was affected by error:

(1)    The respondents’ conduct viewed as a whole, including their silence, conveyed that there was no history of arrears on the part of any of the Food Court Tenants between December 2016 and July 2017. Assessed in the context of the whole course of conduct, the Data Room Arrears Reports conveyed that none of the Food Court Tenants had arrears in any month from December 2016 to July 2017:

•    the Data Room Arrears Reports, including the Tenant Arrears Report for July 2017, did not indicate that any of the Food Court Tenants had arrears in rent;

•    there was no other document in the data room or otherwise which identified any arrears of rent on the part of the Food Court Tenants; and

•    on 30 August 2017, CPRAM represented (either expressly or through silence) that the Food Court Tenants had neither current arrears nor a relevant history of arrears.

What that conduct conveyed was misleading because there was a material history of arrears, including outstanding arrears as at 31 July 2017.

(2)    If Elanor had not been misled by the respondents’ conduct, Elanor would only have been prepared to offer an amount lower than $55.25 million for the purchase of the Centre with the (uncontroversial) result that it would not have purchased the Centre.

(3)    The real value of the Centre was $51.65 million. The result is that Elanor is entitled to damages in the amount of $2.95 million once account is taken of the agreed adjustment of $650,000 related to the rental guarantee. This amount should be apportioned between the respondents as concurrent wrongdoers.

15    In the reasons that follow, references to relevant affidavits are provided by stating the name of the deponent, followed by a number indicating whether the reference is to the first or second affidavit, followed by the relevant paragraph number. References to “AB” are to the page number of Part C of the Appeal Book. These include references to the trial transcript.

FACTUAL BACKGROUND

16    Elanor is a corporation within the Elanor Investors Group. It conducts an investment and funds management business. Elanor is the responsible entity of the Elanor Investment Fund which is a registered managed investment scheme operated pursuant to a trust. Units in the trust form part of stapled securities listed on the Australian Stock Exchange: J[10].

17    Mr Blake McNaughton, an executive director of Elanor, was centrally involved in assessing the purchase of the Centre as an investment to be marketed to sophisticated investors in a proposed unregistered management investment scheme.

18    Mr McNaughton reported to Mr Michael Baliva as to the outcome of the assessments that he made concerning the prospective acquisition: J[12]. Mr Baliva was Elanor’s co-head of real estate: J[12]. Mr Baliva’s primary role was to report to Elanor’s board in relation to the proposed acquisition.

19    The Centre was constructed in 2008 as a neighbourhood shopping complex. It comprised 49 tenancies with a Woolworths Supermarket as the anchor tenant: J[2]. It was purchased by Alceon on 3 April 2013 for $41,750,000: J[51].

20    Alceon entered into an investment management agreement with CPRAM on 13 December 2012 under which CPRAM accepted appointment as one of the joint managers of the “Bluewater Trust”. CPRAM’s duties included identification of intended trust acquisitions, management of trust assets, budgeting, forecasting, reporting and oversight of day-to-day asset management and administration of trust assets: J[19]. It also had the task of identifying opportunities for the disposal of trust assets: J[50].

21    Mr Frenil Shah was a director of CPRAM. He was the portfolio manager in relation to four shopping centres, including the Centre. Mr Shah’s responsibilities included supervising centre managers and liaising with external contractors and consultants. As portfolio manager he was responsible for oversight of the day-to-day management and administration of the Centre, financial analysis and reporting, as well as being a direct liaison with the tenants. Mr Frenil Shah supervised Mr Carrigan (a leasing manager), Mr Song (an analyst) and Mr Neil Shah (his brother and a junior analyst). Mr Frenil Shah recommended that Alceon engage Savills as the property manager for the Centre.

22    Alceon engaged Savills as the on-site property manager at the Centre, under a property management agreement dated 19 December 2015: J[14]. Ms Anna-Maree Coco was employed by Savills as the on-site property manager between May 2016 and November 2017: J[14]. Savills provided services which included the general administration of each of the tenancies by collecting rent, holding security deposits, ensuring compliance with tenant obligations, maintaining a tenancy schedule, maintaining tenancy files and financial management: J[51]. Savills’ financial management obligation included the preparation of: monthly financial management reports for the Centre; a monthly statement of monies received and expenses incurred; the issue of monthly invoices to tenants; the collection of rent and charges; and review of rental arrears.

23    Savills operated a reporting system, referred to as the “MRI Management System”, for its financial management and reporting obligations to Alceon. Neither Alceon nor CPRAM had the ability to make changes within the MRI Management System, but CPRAM could generate reports from it: J[162].

24    CPRAM recommended to Alceon that the dining or restaurant areas or precincts in the Centre be upgraded: Shah 1 at [30]. The proposed project formed part of a broader strategy for the Centre, designed to attract a range of new tenants and adding “attractive dining options” in the Centre: Shah 1 at [32]; J[55]. It involved upgrading the existing restaurant precinct and the creation of a new restaurant precinct, referred to in the cross-examination of Mr McNaughton as the “casual dining precinct”. The “casual dining precinct” was also sometimes referred to as the “new precinct” or the “external precinct”. CPRAM’s recommendation was accepted and work commenced in late 2016.

25    Elanor’s case focussed on the nine Food Court Tenants. Two of these tenants had operated for some time (Bel Cibo and Sushi Kuni) and the remainder were new tenants. The nine Food Court Tenants were:

(1)    TGS Kuber Pty Ltd trading as Dizzy Dukes Bar and Grill, which operated an American style bar and grill. According to the lease terms, its lease commenced on 1 April 2017. The actual rent commencement date was 1 June 2017: AB235.

(2)    Kailash Corporation Pty Ltd trading as Burrito Bar, which operated a Mexican restaurant. According to the lease terms, its lease commenced on 1 March 2017. The actual rent commencement date was 14 May 2017: AB235.

(3)    Tushaan Enterprises Pty Limited trading as Bel Cibo, which operated an Italian restaurant. According to the lease terms, its lease commenced on 1 May 2016. The actual rent commencement date was 15 June 2016: AB235.

(4)    Mass Nutrition Chermside Pty Ltd, which was a supplier of fitness supplements. According to the lease terms, its lease commenced on 1 April 2017. The actual rent commencement date was 1 May 2017: AB235.

(5)    Queensland Employment Services Pty Ltd trading as Kebab Express which operated a fast-food outlet. According to the lease terms, the lease commenced 1 April 2017. The actual rent commencement date was 1 June 2017: AB235.

(6)    Gorani Pty Ltd trading as Sushi Kuni, which operated a Japanese style fast food outlet. The lease for the original operator of Sushi Kuni commenced on 15 February 2015. The lease was assigned with effect from 30 April 2017. The actual rent commencement date was 15 June 2016: AB235.

(7)    TGS Kuber Pty Ltd, trading as Mumbai Blues, which operated an Indian restaurant. According to the lease terms, the lease commenced on 1 March 2017. The actual rent commencement date was 1 May 2017: AB235.

(8)    Thai Me Down Pty Ltd, which operated a Thai restaurant. According to the lease terms, the lease commenced on 1 May 2017. The actual rent commencement date was 1 July 2017: AB235.

(9)    Ms Jie Liu trading as Redcliffe Noodle Kitchen, which operated an Asian noodle restaurant. According to the lease terms, the lease commenced on 1 April 2017. The actual rent commencement date was 25 June 2017: AB235.

26    Alceon appointed the real estate firms Stonebridge Property Group and CBRE to market the Centre for sale: J[56].

27    By an Information Memorandum finalised on 2 May 2017 and emailed on that day to Mr McNaughton, Alceon sought expressions of interest for a sale of the Centre closing on 30 May 2017: J[3], [56]. It noted that leases and associated documents were available in an electronic data room. Mr McNaughton was provided with access to the data room on 10 May 2017. He commenced inspecting documents on 11 May 2017. There was a data room log which recorded who accessed the data, when, for how long and what was viewed. Documents could be downloaded and printed, either individually or in bulk. The data room log recorded that Mr McNaughton performed a bulk download of all of the documents in the data room on 18 May 2017 (comprising 484 documents) and another bulk download on 23 May 2017 (comprising 486 documents).

28    On 30 May 2017, Elanor submitted an expression of interest to Alceon to purchase the Centre for $54.75 million: J[3], [58]. The trial judge found at J[59] that, at this time, Mr McNaughton:

(a)    knew that the Food Court Tenants in the casual dining precinct had not commenced to trade and that this area was “a work in progress” and that they “may or may not fall into rental arrears”;

(b)    had made no inquiries as to whether any of the Food Court Tenants outside of the casual dining precinct had commenced to trade and did not know whether or not those Food Court Tenants were in arrears in rent.

29    As to the matter in (a) above, only three of the nine Food Court Tenants were located in the “casual dining precinct”. This precinct was the subject of works which sought to take advantage of that area’s frontage to a council carpark, which explains why it was sometimes referred to as the “new precinct” or the “external precinct”: AB2969.21 – 26; AB1439. It was uncontroversial that Mumbai Blues, Thai Me Down and Redcliffe Noodle Kitchen were located in what was referred to as the “casual dining precinct” or “external precinct”: AB3111.22 – 26. These were new tenants. It was uncontroversial that Sushi Kuni, which was adjacent to the “casual dining precinct”, had commenced trading by at least July 2015, about two years earlier: AB2928.41 – 2929.3. It was also uncontroversial that Sushi Kuni had continued to generate income over the course of the whole period in which the casual dining precinct was being developed T115.10 – 15; AB1464.

30    Elanor’s expression of interest: (a) expressly assumed the annual fully leased and passing net operating income as $4,230,309 and $3,870,759 respectively, as had been represented in the Information Memorandum; (b) required Alceon to grant a rental income guarantee equivalent to 2 years’ gross market rent for any tenancy that was vacant as at the settlement date (there being five vacant tenancies at the time); (c) requested the grant of an exclusive dealing period of 20 business days during which Elanor would conduct due diligence to its satisfaction and negotiate in good faith to agree and execute a contract of sale; (d) was stated to expire on 2 June 2017: J[58].

31    Alceon did not accept Elanor’s expression of interest. Alceon entered into a conditional contract with another prospective purchaser for a price of $57 million: J[60]. This contract failed to complete. Mr McNaughton and Mr Baliva then met with Mr Gartland of Stonebridge, and Elanor was invited to submit a further expression of interest to purchase the Centre: J[3], [60]. Mr Baliva inspected the Centre with Mr Gartland after this meeting.

32    The casual dining precinct upgrade, as a whole, was complete by at least 1 July 2017, probably by late June 2017: J[55]. However, that is not to say that none of the three Food Court Tenants in that area traded until then. It was uncontroversial that Mumbai Blues traded in at least June 2017: AB1464.

33    After his inspection of the property, Mr Baliva reviewed the Information Memorandum with Mr McNaughton: J[61]. The trial judge stated:

[61]    Mr McNaughton then undertook certain calculations in order to derive a purchase price for the Centre. At that time Mr McNaughton had more than five years’ experience in analysing potential investments and in determining an appropriate investment yield. He derived a yield of 7%, in part based upon yield information disclosed for comparable sales in a database that he had access to. There is a difference in those comparable sales between initial yield and core market yield. As explained by Mr McNaughton, initial yield is based on the passing rent and core market yield is based on the fully leased market rent. In those comparable sales the initial yield is within the range of 5.57% at the lower end and 8.97% at the upper end. On the assessment undertaken by Mr McNaughton, the majority of comparable sales revealed initial yields of 6.5% or less. Despite that comparable sales information, Mr McNaughton considered that the Centre should be purchased at a higher yield for a number of reasons: the reported sales for Woolworths were less than what might be expected, the Centre faced an increased risk of competition, the Woolworths lease was due to expire (subject to the exercise of any options) in 2028, the catchment area for the Centre was limited by its proximity to the coast and was relatively small in comparison with other centres and the purchase price that Alceon wanted (in excess of $50 million) was comparatively high with a corresponding increased risk of investment.

34    Mr McNaughton applied the yield of 7% to the net operating passing income: J[62]. He used a figure of $3,907,170 which was the same as the figure for total passing net operating income disclosed in a revised statement of financial figures for the Centre that had been emailed to Mr McNaughton on 2 August 2017. The figure of $3,907,170 was based on a financial summary and projection as at 1 December 2017. In order to calculate the purchase price, Mr McNaughton divided $3,907,170 by the yield of 7% and then multiplied the result by 100 to arrive at $55,816,714. In accordance with his practice, Mr McNaughton subtracted $500,000 on account of his estimate of the expected future capital expenditure, based on 1% of the purchase price and then rounded down to $55.25 million. At the time, Mr McNaughton was aware that there were five vacant tenancies: J[68]. He addressed this by including a condition in the expression of interest that Alceon provide a rental income guarantee equivalent to two years’ gross market rent for any vacant tenancy as at the settlement date.

35    Mr McNaughton and Mr Baliva discussed Mr McNaughton’s calculations and Mr Baliva agreed with his assessment and methodology.

36    Mr Baliva signed a second expression of interest, dated 16 August 2017 to purchase the Centre for $55.25 million.

37    On 18 August 2017, Alceon and Elanor entered into a Heads of Agreement in relation to a potential sale of the Centre for $55.25 million.

38    The Heads of Agreement provided for an exclusive dealing period of 20 business days, commencing on 21 August 2017 and concluding on 15 September 2017 during which period Elanor would conduct due diligence: J[4]. The Heads of Agreement also relevantly provided (J[69]):

(1)    The annual fully leased and passing net operating income, as at 1 December 2017, was $4,266,720 and $3,907,170 respectively, as per the information provided.

(2)    The vendor would grant to the purchaser a rental income guarantee equivalent to two years’ gross market rent for any tenancies which are not subject to a lease at the date of settlement, as per the financials provided as at 1 December 2017. This guarantee would be held in a trust account managed by the purchaser’s solicitor.

(3)    All outstanding leasing incentives, fit-out contributions, rental abatements, and other capital commitments would remain the responsibility of the vendor and be adjusted in the purchaser’s favour at settlement.

(4)    All bank guarantees and or security deposits required under the leases would be in place at settlement and novated across to the purchaser. There would be an adjustment in favour of the purchaser for any outstanding bank guarantees or security deposits not provided at settlement.

39    In mid-August 2017, Mr McNaughton spoke with Mr Alexander (Sandy) Hamilton of CBRE Pty Ltd for the purpose of retaining CBRE to undertake a due diligence assessment: J[72]. Mr Hamilton was the regional director for CBRE’s investment advisory services with experience in performing due diligence investigations for investors buying or selling multi-tenanted properties, including regional and sub-regional shopping centres in Australia: J[13]. Mr McNaughton requested the submission of a written proposal from CBRE, with a fee estimate, which he received on 21 August 2017: J[72].

40    Amongst other matters, Mr Hamilton offered a “financial and tenancy due diligence service” which included “comparison of the net income provided by the vendor with our revised estimate of the sustainable net income”. Pursuant to the scope of works, Mr Hamilton advised that he would undertake “a critical review of all income and expenditure” to cover a number of issues including: a review of the commercial aspects of the lease agreements and audit of the tenancy schedule; the identification of any clause in the lease “that may have an impact on the income stream”; review of the trading performance of the property including the major tenants and each individual tenant; review and comment “upon the current arrears report”; the undertaking of a SWOT analysis; the identification of “‘problem’ tenants” by analysis of arrears reports; and the undertaking of a check of rental and other charges due under each lease with the charges depicted on monthly invoices. CBRE offered to do this work for a fee of $50,000 plus GST. Mr McNaughton accepted the proposal.

41    On 21 August 2017, Mr McNaughton sent an email to Mr Hamilton attaching a financial pack of relevant information.

42    Mr McNaughton also contacted Mr Kwan on 21 August 2017, first by telephone and then by confirming email: J[73]. Mr Kwan was a partner and Head of Valuation and Advisory at Knight Frank Valuation and Advisory Queensland (KFVAQ). Mr McNaughton provided to Mr Kwan the financial information received from Stonebridge and the Information Memorandum and requested a valuation proposal. Mr McNaughton received a fee proposal from Mr Kwan later that day, which he accepted: J[74].

43    Alceon and CPRAM made information available in an electronic data room for Elanor to conduct its due diligence: J[53]. Mr McNaughton and Mr Baliva had access to the data room throughout the due diligence period: J[71]. Amongst other things, the data room contained copies of: (a) leases for the Food Court Tenants; (b) Incentive Deeds; and (c) the Tenant Arrears Reports: J[53]. CBRE and Elanor were each able to make inquiries regarding the tenants and the financial position of the Centre through a question-and-answer facility in the data room. As is explained further below, the Tenant Arrears Reports did not identify any of the Food Court Tenants as being in arrears for any amount: J[54].

44    Mr McNaughton accessed the data room on 21 August 2017 when he undertook a bulk download of 628 documents: J[57]. Each “Tenant Arrears Report” contained in the data room bore Savills logo and recorded that they were: “Produced by smart (Savills Management Accounting & Reporting Tools)”. These were produced from what has earlier been referred to as the MRI Management System. As at 21 August 2017, the data room contained seven unredacted Tenant Arrears Reports as follows:

    December 2016, dated 21 June 2017: AB1316. This referred to one tenant of the Centre, not being a Food Court Tenant. This was one page long.

    January 2017, dated 21 June 2017: AB1317. This referred to two tenants of the Centre, not being Food Court Tenants. This was one page long.

    February 2017, dated 21 June 2017: AB1318. This referred to two tenants of the Centre, not being Food Court Tenants. This was one page long.

    March 2017, dated 4 April 2017: AB1319. This referred to five tenants of the Centre, not being Food Court Tenants. This was two pages long.

    April 2017, dated 17 May 2017: AB1321. This referred to five tenants of the Centre, not being Food Court Tenants. This was two pages long.

    May 2017, dated 21 June 2017: AB1323. This referred to six tenants of the Centre. The only Food Court Tenant mentioned was Bel Cibo which had $10 credit. This was two pages long.

    June 2017, dated 25 July 2017: AB1325. This referred to five tenants of the Centre, not being Food Court Tenants. This was two pages long.

45    These seven Tenant Arrears Reports – together with an arrears report later added to the data room for July 2017, referred to below – will be referred to as the Data Room Arrears Reports. These did not reveal that any of the Food Court Tenants were in arrears for any of the months from December 2016 until July 2017. These Tenant Arrears Reports need to be distinguished from Tenant Arrears Reports covering some of the same months, referred to below, first produced during the proceedings under a subpoena issued to Savills, indicating that Food Court Tenants did have a history of arrears in those months, the Discovered Arrears Reports.

46    The trial judge found that, of the Data Room Arrears Reports, Mr McNaughton reviewed reports for May and June 2017, “but not until 30 October 2017”: at J[71]. It is clear from this finding, and what is said elsewhere including at J[126] and [155], that the trial judge overlooked that Mr McNaughton’s unchallenged evidence was that, on 21 August 2017, he briefly reviewed the documents contained in the data room that referred to the Centre income, outgoings and any documents in respect of arrears: McNaughton 1 at [44], [71] and [74]; AB2942.16 to 2943.14.

47    The trial judge ought to have concluded that, on 21 August 2017, Mr McNaughton reviewed the Data Room Arrears Reports for the months of December 2016 through to June 2016. Mr McNaughton’s evidence was that he did not see any documents about arrears which concerned him: McNaughton 1 at [71] and [74]. Mr McNaughton’s unchallenged evidence at McNaughton 1 at [74] was:

… I had not seen anything in my review of the documents in the Data Room, including the Dec - June Arrears Reports, to indicate that any of the Food Tenants were in arrears at any point in the six months prior. Because the July Arrears Report was not of concern, and I had not seen any other arrears reports of concern in my own review, I did not question Mr Hamilton on this further either in our meeting on 6 September 2017 or any other time. I did not investigate any of the Food Tenants further after the due diligence and prior to entering the Sale Contract. I included all of the Food Tenants in the Passing Income for the Centre in my report to the Board.

48    In cross-examination, Mr McNaughton accepted that his review was brief because he knew that Mr Hamilton would also conduct a review, but Mr McNaughton did not accept that he relied solely on Mr Hamilton’s review: AB2942.37-42.

49    As mentioned earlier, a Tenant Arrears Report for July 2017 was produced and printed on 25 August 2017 and was then made available in the data room: J[82]. It was two pages long. It refers to five tenants, none of which was a Food Court Tenant. A copy of it is reproduced at J[83]. According to the data room log, Mr Hamilton viewed this report on 27 August 2017 and again on 29 August 2017 when he printed it: J[84]. Mr McNaughton viewed the Data Room Arrears Report for July 2017 on 28 August and 30 October 2017: J[71] and [84].

50    It should be noted at this point that it was common ground that the true position was that some of the Food Court Tenants had been in arrears in the period from December 2016 to July 2017 and also later, in August, September and October 2017. This was the subject of evidence which included various business records and expert evidence. As mentioned, the Discovered Arrears Reports were first obtained during the course of the proceedings. The accuracy of them was the subject of debate in expert evidence to be discussed below. They comprised Tenant Arrears Reports each of which, although in the same form as the Data Room Arrears Reports, were significantly lengthier and were heavily redacted (but not necessarily appropriately) to remove reference to tenants in arrears who were not one of the Food Court Tenants. The length of the complete versions of the Discovered Arrears Reports is not known. The Discovered Arrear Reports, as included in Part C of the Appeal Book, were as follows:

December 2016

(1)    Pages 2, 3, 9 and 10 of a Tenant Arrears Report for December 2016, dated 20 December 2016: AB595-598. It showed the following Food Court Tenants to be in arrears in that month:

•    Bel Cibo: $21,213.19

•    Sushi Kuni: $19,742.56

January 2017

(2)    An unnumbered page and page 10 of a Tenant Arrears Report for January 2017, dated 7 February 2017: AB599-600. It showed the following Food Court Tenants to be in arrears in that month:

•    Bel Cibo: $2,523.95

•    Sushi Kuni: $4,028.58

March 2017

(3)    Page 2 of a Tenant Arrears Report for March 2017, dated 5 April 2017: AB601. It showed the following Food Court Tenant to be in arrears in that month:

•    Bel Cibo: $8,969.49

April 2017

(4)    Pages 4, 8 and 9 of a Tenant Arrears Report for April 2017, dated 5 May 2017: AB602-604. It showed the following Food Court Tenants to be in arrears in that month:

•    Bel Cibo: $10,754.70

•    Sushi Kuni: $15,708.59

May 2017

(5)    Pages 2, 3, 7 and 8 of a Tenant Arrears Report for May 2017, dated 7 June 2017: AB605-608. It showed the following Food Court Tenants to be in arrears in that month:

•    Burrito Bar: $5,278.50

•    Bel Cibo: $7,882.23

•    Sushi Kuni: $14,328.90

•    Mumbai Blue: $2,961.01

It also showed the following Food Court Tenant to be in advance in that month:

•    Dizzy Dukes: $13,750.02

June 2017

(6)    An unnumbered page and pages 2, 3, 4 and 12 of a Tenant Arrears Report for June 2017, dated 1 June 2017: AB609-613. It showed the following Food Court Tenants to be in arrears in that month:

•    Burrito Bar: $40.51

•    Bel Cibo: $10,271.11

•    Sushi Kuni: $23,614.79

•    Mumbai Blue: $5,921.96

It also showed the following Food Court Tenant to be in advance in that month:

•    Dizzy Dukes: $5,197.08

(7)    An unnumbered page and pages 2, 3, 7 and 8 of a Tenant Arrears Report for June 2017, dated 6 July 2017: AB614-618. It showed the following Food Court Tenants to be in arrears in that month:

•    Burrito Bar: $40.51

•    Bel Cibo: $10,271.11

•    Sushi Kuni: $19,214.79

•    Mumbai Blue: $5,921.96

It also showed the following Food Court Tenant to be in advance in that month:

•    Dizzy Dukes: $5,197.08

July 2017

(8)    Pages 1, 2, 5 and 6 of a Tenant Arrears Report for July 2017, dated 15 August 2017: AB619-622. It showed the following Food Court Tenants to be in arrears in that month:

•    Dizzy Dukes: $2,899.17

•    Bel Cibo: $16,271.53

•    Sushi Kuni: $21,088.72

•    Mumbai Blue: $8,847.96

It also showed the following Food Court Tenant to be in advance in that month:

•    Mass Nutrition: $5,041.67

•    Kebab Express: $4,396.68

•    Thai Me Down: $6,176.50

September 2017

(9)    Pages 1, 2, 3, 6, 7 and 8 of a Tenant Arrears Report for September 2017, dated 5 October 2017: AB623-628. It showed the following Food Court Tenants to be in arrears in that month:

•    Dizzy Dukes: $28,606.92

•    Burrito Bar: $26,011.91

•    Bel Cibo: $10,242.95

•    Mumbai Blue: $10,759.64

•    Redcliffe Noodle Kitchen: $5,606.34

It also showed the following Food Court Tenant to be in advance in that month:

•    Sushi Kuni: $1,613.19

51    At some time before 28 August 2017, Mr McNaughton contacted Mr Stephen Schneider of Colliers by way of inquiry as to whether Colliers would manage the Centre for Elanor, should Elanor be the successful purchaser: J[86]. Without being asked to do so, Mr Schneider visited the Centre on 28 August 2017 at 3.40 pm and provided a report by email to Mr McNaughton at 4:16 pm. Under the heading “Retailer and Performance” he observed:

At 3:40 the Centre is very quiet, would think with school pick up the Centre would be busier

Woolworths looks fresh with new fitout - not very busy

Internal common area retailers - one vacancy next to What’s Hot

Donut King and lean green kitchen extremely quiet - no customers for 20 minutes

Sushi kiosk closing at 4pm

Juice kiosk closed - possible vacancy.

Level 1 commercial looks to be ok with traffic flow to that level

Good mix of food and services internally

External tenancies mainly food retailers.

All food retailers extremely quiet with a vacancy next to Thai restaurant

Restaurants not all trading - only opening for lunch and dinner

Potentially too much food - not enough traffic / customers to support the two precincts

Australia Post should be internal to pull traffic - post boxes could remain in current location.

52    The trial judge noted that Mr McNaughton “accepted in cross-examination that based on this information he was aware, during the due diligence period, that the Food Court Tenants were quiet, at least on the day and at the time of the inspection and that there were insufficient customers to support the two food precincts at the Centre”: J[87].

53    Mr McNaughton emphasised in cross-examination that Mr Schneider’s opinion about the insufficiency of customers for the food precincts was an opinion about the number of food customers at 3:40 pm on a Monday: AB2958.45 – 2959.1.

54    On 30 August 2017, Mr Hamilton and two of his colleagues, Ms Brunninghausen and Ms Levene, met with Mr Frenil Shah of CPRAM at the Centre for the purpose of a tenant-by-tenant review: J[88]. What was said at this meeting was a matter of significant contest.

55    Mr Hamilton’s account was supported by a contemporaneous file note which had been partly pre-prepared in anticipation of the meeting and partly completed during the course of the meeting by Ms Levene. The trial judge accepted Mr Hamilton’s account of what occurred at the 30 August 2017 meeting and rejected Mr Frenil Shah’s account. The trial judge found Mr Hamilton to be impartial and reliable and Mr Frenil Shah not credible. The trial judge accepted that Mr Hamilton asked questions about whether any of the Food Court Tenants were then in arrears and was not told that they were. The trial judge proceeded on the basis that Mr Hamilton did not ask about whether there was a history of arrears, but – as is explained later – this was based on a misunderstanding of the evidence that was in fact given.

56    At this point in time, neither Mr McNaughton nor Mr Hamilton had seen or been told anything which indicated that any of the Food Court Tenants were in, or had a history of, arrears.

57    On 7 September 2017, Mr Kwan provided draft calculations for the purpose of preparing a valuation for the Bank of Queensland, which showed a market value of $55.25 million: J[89].

58    On about 8 September 2017, Mr McNaughton met with Mr Baliva. They reviewed the documentation provided through the due diligence and the valuation figures from Mr Kwan. From these documents, they prepared a document entitled “ENN Board Transaction Due Diligence Checklist” and a document entitled “Investment Overview”. The Checklist and the Investment Overview made up the report to be provided to the board: McNaughton 1 at [79]; J[90]. The report was provided to the Elanor Board as part of an agenda with supporting documentation on either 8 or 9 September 2017.

59    The Checklist recorded, amongst other things, that: the financial due diligence being undertaken by Mr Hamilton was a work in progress and that the valuation of the Centre by Mr Kwan was a work in progress, noting that “draft numbers received which support purchase price”.

60    The Checklist also recorded that: a demographic due diligence prepared by Location IQ was complete; council zoning and town planning investigations were complete; and architectural scheme proposals prepared by Bureau Proberts were complete.

61    The Investment Overview was a document prepared for the purpose of submission to prospective investors in the proposed management investment scheme: J[93]. It included the following statements:

•    Acquired at a 7.7% fully leased yield (7% passing) representing a discount to prevailing market yields

…

•    Medium development potential into a mixed use scheme given favourable zoning (27 m (9 storeys) across majority of 1.356 ha site), new transport infrastructure and picturesque coastal location

…

•    Forecast Total Return (if property were to be sold at end of year three and excluding any development potential of additional floor space given favourable planning regime):

Base IRR: 12.0% p.a

Target IRR: 14.0% p.a

…

•    The Manager will review exit/liquidity strategies within an investment horizon of approximately 3 years, subject to the Manager’s discretion

62    The trial judge emphasised that “an entire page of the document [was] devoted to the development potential of the site”: at J[94].

63    On being satisfied as to the extent of due diligence undertaken, the directors of Elanor executed a circulating resolution, the effect of which was to authorise officers of Elanor to enter into a Put and Call Option Agreement to purchase the property: J[4]; [91].

64    On 11 September 2017, Mr Kwan emailed new calculations to Mr McNaughton and Mr Baliva and Mr McNaughton responded: J[96], [97]. On 15 September 2017, being the end of the due diligence period, CBRE provided a draft due diligence report to Mr McNaughton: J[99].

65    On 15 September 2017, Alceon and Elanor entered into the Option Agreement: J[99].

66    On 18 September 2017, CBRE finalised and delivered its due diligence report to Elanor: J[100]. The trial judge recorded at J[102]:

[102]    Section 5 of the report is a SWOT analysis. The strengths identified include the existing lease to Woolworths, the recently upgraded external casual dining precinct and the likely primary sector trade area population growth of 1% per annum forecast to 2036. Identified weaknesses include a reference to the fact that “several tenants” have experienced sales decreases of 5% or more in the past year. Under opportunities, it is mentioned that there is: “potential for strong population growth in the immediately surrounding area if DA approved apartment developments proceed”. Under threats it is said: “the trading performance of the new external restaurant precinct is unproven and it remains to be seen if it will provide the hoped for increase in sales and customer traffic.”

67    The trial judge recorded at J[103] that section 7 of the report addressed the 30 August 2017 meeting:

[103]    Section 7 of the report comprises a tenancy review “based upon our review of the information provided in discussions with the Asset Manager”, which is a reference to the 30 August meeting. No issue is raised in that analysis with the performance of any of the Food Court Tenants, although they are dealt with in section 8: Review of Retail Sales Performance. The nine Food Court Tenants are mentioned with a high level of analysis by comparing occupancy costs per square metre and sales per square metre of the Centre as a whole with benchmarks published by Urbis. The result is that the occupancy costs and sales for the Centre are each lower than the benchmarks. Section 11 notes that CBRE “have been provided with an arrears report dated July 2017” which disclosed there “was a credit of $2,957.05 and there were no significant arrears dated 30 days or over”. That statement is incorrect: the report records arrears in that sum, not prepayments.

68    The trial judge recorded that section 12 of the report was concerned with tenancies at risk: J[104]. Sushi Kuni was the only Food Court Tenant mentioned, because of its occupancy cost ratio of 28.1%.

69    On 23 October 2017, Elanor exercised the Call Option: J[108]. As a result, Elanor and Alceon became contracting parties for the sale of the Centre pursuant to a Sale Contract dated 23 October 2017 for a price of $55,250,000, less certain adjustments to be made at settlement.

70    The trial judge noted that the respondents emphasised certain clauses in the Sale Contract. These were summarised at J[108] in the following way:

(1)    The buyer acknowledges that it has not relied, and does not rely, on any representation or warranty of any nature made by or on behalf of the seller, the seller’s solicitor or the agent other than those expressly set out in this contract: cl 3(b);

(2)    The buyer acknowledges that the seller has made available and disclosed to the buyer on or before the option date all relevant due diligence material: cl 5(a);

(3)    The buyer acknowledges that subject to special condition 33, the seller makes no representation or warranty as to the accuracy or otherwise of the information contained in the due diligence material: cl 5(b)(i);

(4)    The buyer acknowledges that the seller has not conducted its own independent inquiries and investigations into information in the due diligence material prepared by third parties: cl 5(b)(ii);

(5)    The due diligence material may include statements, estimates and projections that reflect various assumptions which may or may not be correct and does not purport to contain all of the information the buyer may require: cl 5(b)(iv);

(6)    The seller does not warrant or represent that any lease will be in force on settlement or that the provisions of each lease have been complied with: cl 10.4(c) and (d);

(7)    The seller warrants to the buyer as at the option date and to the best of the seller’s knowledge, information and belief based on due inquiry, but without independent verification that the tenancy schedule is correct (as at the date of the tenancy schedule) in all material respects, the outstanding incentive schedule is correct (as at the date of the outstanding incentive schedule) in all material respects and that all questions and answers are given in good faith: cl 33.1.

71    The trial judge observed at J[109] that the respondents did not contend that these clauses operated to displace liability for misleading or deceptive conduct. Rather, the clauses were emphasised as part of the context within which the asserted misleading or deceptive conduct was to be viewed.

72    On 27 October 2017, Alceon’s solicitor provided to Elanor’s solicitor a copy of the Tenant Arrears Report for October 2017 together with an outstanding incentive schedule as at 31 October 2017: J[110]. Only one of the five tenants then in arrears was one of the Food Court Tenants, namely Burrito Bar which had an amount of $11,022.85 outstanding for less than 30 days.

73    The Sale Contract settled and Elanor became the registered proprietor of the Centre by transfer dated 1 November 2017: J[110].

74    Although not referred to in the trial judge’s reasons, Elanor’s business records revealed a history of continuing arrears in rent on the part of the Food Court Tenants from the time Elanor became the owner on 1 November 2017 until 30 June 2018. This was summarised in McNaughton 1 at [96] in the following table:

75    Each one of the nine Food Court Tenants ultimately vacated or abandoned their leases and Elanor resumed possession: J[111]. The trial judge accepted Mr McNaughton’s evidence in this regard, which his Honour summarised at J[111]. Mr McNaughton’s evidence (McNaughton 1 at [94]) was:

[94]    Since November 2017:

(a)    The owner of Burrito Bar vacated and abandoned its premises at the Centre in January 2018. Elanor re-entered and took possession of its premises, terminating the lease. As at 30 June 2018 there was $43,572.73 in unpaid rent, outgoings, electricity, other direct recoveries and GST for those premises. At page 1456 of Exhibit BM1 is a copy of the Termination Notice dated 15 January 2018 [AB2191].

(b)    The owner of Thai Me Down wished to surrender the lease of its premises at Bluewater Square on 30 June 2018. No agreement was reached between the parties as to the terms of the surrender and accordingly at no time was a Deed of Surrender of Lease executed by the parties. As a consequence of its unremedied failure to pay rent under the lease, Elanor terminated Thai Me Down’s lease of its premises at Bluewater Square on 30 June 2019.

(c)    Elanor terminated Sushi Kuni’s lease of its premises at Bluewater Square on 4 February 2019, as a consequence of its unremedied breach of the lease. At page 1457 of Exhibit BM1 is a copy of the Termination Notice dated 4 February 2019 [AB2192].

(d)    Bel Cibo went into liquidation on 12 April 2019. On that date the liquidator gave notice to Elanor that he disclaims Bel Cibo’s lease of its premises at Bluewater Square. At page 1458 to 1460 of Exhibit BM1 is a copy of a letter from the liquidator to Elanor dated 2 May 2019 attaching a copy of the Notice of Declaimer dated 12 April 2019 [AB2221 – 2223].

(e)    Elanor terminated Dizzy Dukes’ lease of its premises at Bluewater Square on 26 April 2019, as a consequence of its unremedied breach of the lease. At page 1461 of Exhibit BM1 is a copy of the Termination Notice dated 26 April 2019 [AB3219].

(f)    Elanor terminated Mumbai Blues’ lease of its premises at Bluewater Square on 26 April 2019, as a consequence of its unremedied breach of the lease. At page 1462 of Exhibit BM1 is a copy of the Termination Notice dated 26 April 2019 [AB2220].

(g)    Kebab Express ceased trading officially on 16 March 2020. Prior to that time it had been in breach of its lease. As at May 2021 it was in $230,600.34 in arrears. At pages 1463 to 1464 of Exhibit BM1 are copies of an Aged Debtors Report for Kebab Express showing its arrears [AB2307 – 2308]. I am not able to access arrears reports for Kebab Express produced prior to 1 September 2021. Elanor appointed a new centre manager at that time and as at the time of swearing this affidavit I no longer have access to the Colliers’ records. Colliers are the centre manager Elanor first appointed when it purchased the Centre.

(h)    Redcliffe Noodle Kitchen surrendered its lease or about 20 June 2020 following numerous breaches of lease. At pages 1465 to 1479 of Exhibit BM1 is a copy of a signed Deed of Surrender and an aged debtors report as at May 2020 [AB2266 – 2280]. The Deed of Surrender shows the total amount payable by the tenant at the time of surrender of the lease as $76,718.68. The aged debtors report shows Redcliffe Noodle Kitchen in arrears of $73,187.48.

(i)    On 19 March 2018, McAndrew Law acting for the owner of Mass Nutrition sent a letter to Chrissie Hoffman of Colliers on behalf of Elanor requesting Elanor agree to accept a surrender of the lease of Mass Nutrition’s premises at Bluewater Square. At pages 1480 to 1481 of Exhibit BM1 is a copy of the letter from McAndrew Law dated 19 March 2018. The lease was surrendered on 30 June 2018, pursuant to a Deed of Surrender of Lease. At pages 1482 to 1496 of Exhibit BM1 is a copy of the Deed of Surrender of Lease dated 7 November 2018 and the registered Surrender of Freehold Lease dealing number 719154203 [AB2193 – 2209].

THE ARREARS REPRESENTATION

Elanor’s case

76    The FASOC included:

19.    Between about 18 August 2017 and 15 September 2017:

(a)    Alceon and CPRAM provided Elanor and its representatives, including CBRE, access to a data room for the purpose of enabling Elanor to undertake a due diligence process in relation to the Property (Data Room);

(b)    Elanor and its representatives undertook a due diligence process in relation the Property; and

(c)    as part of the due diligence process, Elanor and its representatives were provided access to reports said to record arrears in the payment of tenancy and rental and other lease obligations in respect of the Property from December 2016 to July 2017 as part of the Data Room.

20.    For the purpose of making documents available in the Data Room, Alceon and CPRAM had access to the MRI System maintained and operated by Savills, including reports from such system concerning tenants, payments made by them and rental and other arrears in respect of such tenants.

21.    The Data Room contained copies of:

(a)     leases for the Food Outlets;

(b)     incentive deeds for Dizzy Dukes, Burrito Bar, Mass Nutrition, Kebab Express, Mumbai Blue, Thai Me Down, and Redcliffe Noodle Kitchen (Incentive Deeds);

(c)     a document for each of the months between December 2016 and July 2017 titled “Tenant Arrears Report” (Tenant Arrears Reports).

22.    The Tenant Arrears Reports did not identify any of the Food Outlets as being in arrears for any amount.

23.    Other than the Tenant Arrears Reports for December 2016 and July 2017, no other Tenant Arrears Reports nor any other documents were provided recording tenancy arrears in respect of the Property for the period December 2016 to July 2017.

24.    The Tenant Arrears Report recorded for the month of July 2017:

(a)     identified the total arrears in respect of that month as $2,957.05; and

(b)     did not identify any of the Food Outlets as being in arrears for any amount.

25.    On or about 30 August 2017, Alexander Hamilton, Sophie Brunninghausen and Georgie Levene of CBRE, met with Mr Frenil Shah of CPRAM at the Property (30 August Meeting).

26.    On 30 August 2017:

(a)     Alexander Hamilton asked Frenil Shah about the trading and rental performance of each of the tenants of the Property; and

(b)    in response Mr Shah did not identify any of the tenants of the Food Outlet as:

(i)    having outstanding arrears;

(ii)    receiving any abatements or incentives beyond those disclosed in the Incentive Deeds; or

(iii)    having any issue in respect of their respective sales, their ability to pay rent or to satisfy their other obligations under their respective leases.

…

35.    On 27 October 2017, Minter Ellison on behalf of Alceon provided Connor O’Meara on behalf of Elanor with copies of:

(a)    a document titled ‘Tenant Arrears Report’ for the month of October 2017 (October Arrears Report);

(b)    a document titled ‘Outstanding Incentive Schedule as at 31 October 2017’ (October Incentive Schedule).

Particulars

The documents were provided as attachments to an email from Alan Olcayto of Minter Ellison to Greg O’Meara, Elias Stephen, Despina Roussakis of Connor O’Meara.

36.    The October Arrears Report identified only one of the Food Outlets, being Burrito Bar, as being in arrears and for less than 30 days as at October 2017.

…

40.    The passing base rent per annum and outstanding abatements in respect of the Food Outlets were stated in the Tenancy Schedule, the Outstanding Incentive Schedule and the October Incentive Schedule respectively to be as follows:

[Table omitted]

…

44.    By reason of the matters pleaded in paragraphs 19 to 26 and 35, 36 and 40 above, Alceon and/or CPRAM represented to Elanor that:

    …

(f)    The Tenant Arrears Reports and the October Arrears Report were correct and complete statements of all amounts which had not been paid by the Food Outlet tenants in the corresponding month for that report from all previously rendered invoices and that all amounts in invoices rendered in the months prior to the month of the respective report had otherwise been paid in full by the tenants of the respective Food Outlets (Arrears Representations);

Particulars

The Arrears Representations are partly express, partly implied and partly oral.

(i)    In so far as they are express, they are contained in the Tenant Arrears reports and the October Arrears Report.

(ii)    In so far as they are implied, they arises [sic] from the circumstances in which the Tenant Arrears Reports and the October Arrears Report were provided and absence of any other document or information of a similar nature for different periods or difference [sic] tenants being provided.

(iii)    In so far as they are oral, they arise from the matters and conversations pleaded in 25 and 26 above.

…

46A     Further, or alternatively, by reason of the matters pleaded in paragraphs 19 to 26 and 35, 36 and 40, Elanor had a reasonable expectation that Alceon and/or CPRAM would have disclosed to Elanor if any of the Food Court Tenants were in arrears of more than 30 days during the period December 2016 to October 2017.

77    Put simply, Elanor’s case on misleading or deceptive conduct was that:

(a)    the monthly Data Room Arrears Reports for the months December 2016 to June 2017 reviewed by Mr McNaughton did not suggest that the Food Court Tenants had arrears of rent (and one would expect them to show such arrears if those tenants did have arrears);

(b)    the Tenant Arrears Reports for July 2017 reviewed by Mr McNaughton and Mr Hamilton did not suggest that the Food Court Tenants had arrears of rent (and one would expect them to show such arrears if those tenants did have arrears);

(c)    neither Mr McNaughton nor Mr Hamilton saw any other documentation in the data room or otherwise recording arrears of rent in respect of the Food Court Tenants; and

(d)    after Mr Hamilton reviewed the Tenant Arrears Report for July 2017, Mr Hamilton asked Mr Frenil Shah on 30 August 2017, in a tenant-by-tenant review, questions about current and historical arrears of each of the Food Court Tenants and was not told that there was any issue in that respect;

(e)    in light of that conduct:

(i)    the Data Room Arrears Reports conveyed that the Food Court Tenants did not have arrears in the period December 2016 to July 2017;

(ii)    Mr Frenil Shah conveyed that the Food Court Tenants were not in, and did not have a history of, arrears in rent;

(f)    further, in the circumstances, Alceon and CPRAM should have disclosed to Elanor if any of the Food Court Tenants were in arrears of more than 30 days during the period December 2016 to October 2017.

Summary of trial judge’s reasoning on misleading or deceptive conduct

78    The trial judge noted that, by the time of closing submissions, Elanor conceded that its claim could not succeed for Kebab Express, Thai Me Down and Mass Nutrition because there were no arrears for these tenants: J[154].

79    His Honour also stated that the claim framed by reference to the Tenant Arrears Report for October 2017 could not succeed because that report was provided shortly before settlement of the Sale Contract and could not have led Elanor into any anterior error inducing any of its decisions to acquire the Centre: J[154]. His Honour continued:

… Although Elanor conjunctively pleaded that in reliance on the conduct it entered the Option Agreement, exercised the call option and completed the Sale Contract, no evidence was led as to what recommendation would have been put to the board between 15 September 2017, when the Option Agreement was entered into, and 1 November 2017, when settlement of the Sale Contract occurred, relating to options to withdraw from the transaction. Nor was evidence adduced as to what steps would have been taken, including after the call option was exercised on 23 October 2017, about the likely risks that Elanor may have faced in seeking to withdraw, including litigation that it may have then faced …

80    No issue was raised on the appeal about this analysis.

Particular (i) to [44(f)] of the FASOC

81    As to what the trial judge referred to at J[155] as the “express representations”, his Honour’s preliminary conclusions can be summarised relevantly as follows:

(a)    Initially, the data room only included Tenant Arrears Reports for March and April 2017. On or about 21 June 2017, additional reports were printed and uploaded to the data room for December 2016 and January, February, and May 2017.

(b)    A further report for June 2017 was printed on 25 July 2017 and then placed in the data room: J[156]. The Tenant Arrears Report for July 2017 was printed on 25 August 2017: J[158]. Inferentially, this was placed in the data room on or before 28 August 2017: J[155].

(c)    The March, April and June 2017 arrears reports did not identify any of the Food Court Tenants as being in arrears, indeed none of the Food Court Tenants are listed: J[156].

(d)    It was “not necessary to interrogate the content of the December 2016, January, February, and May 2017 reports as Elanor accepts that these reports record the arrears position as at the date of printing, and not as at the close of each month and therefore ‘provide no additional arrears information’ in relation to those months”: J[156].

82    The conclusion at (d) was erroneous for two reasons.

83    First, Elanor’s position was not that the reports did not need to be considered by the trial judge. Its position was that – if it were true that the Tenant Arrears Reports for each of those months only reflected the arrears position as at the print date and noting that the reports were added to the data room at the request of another interested party – then what was the point of providing them when they should all state the same level of arrears given that they were all printed on the same day. Contrary to J[156], Elanor did not “accept that these reports record the arrears position as at the date of printing”.

84    Secondly, Elanor’s case was that Mr McNaughton reviewed each of the Tenant Arrears Reports in the data room on 21 August 2017 (not then including the Tenant Arrears Report for July 2017), understanding them to relate to the month for which the report was stated to apply, and did not see anything which caused him concern.

85    It follows that the trial judge erred in not considering each of the Tenant Arrears Reports. As noted earlier, none of the Data Room Appears Reports revealed any Food Court Tenant to have been arrears. Each of the Data Room Arrears Reports being made available to facilitate due diligence was a part of the conduct relied upon and had to be assessed in order to determine what the conduct as a whole conveyed.

86    The trial judge’s conclusions in relation to the Tenant Arrears Report for July 2017 can be summarised in the following way:

(a)    Mr McNaughton viewed the Tenant Arrears Report for July 2017 “on 28 August and 30 October 2017”: J[155]. Mr Hamilton, and his assistants, also examined the Tenant Arrears Report for July 2017: J[157]. The July Arrears Report did not disclose arrears on the part of any of the Food Court Tenants: J[158].

(b)    The July Arrears Report was ambiguous. His Honour explained this at J[161] in the following way:

In my view the July Arrears Report was ambiguous. If the report purports to be a record of all arrears to 31 July 2017, then what is the point of recording a last payment date and an amount thereafter? Further, what is the point of the date of 25 August 2017 and the time of printing, if objectively the document is a “correct and complete” statement of all amounts “which had not been paid” by any of the Food Court Tenants for amounts previously invoiced?

(c)    The “objective meaning of the two page July Arrears Report … must be considered in the context that it was a component of a large amount of information that was made available to Elanor during the due diligence period as contained in the data room”: J[165].

(d)    The information in the data room included: “rental tax invoices for the period January until May 2017, tenant recovery letters for the financial year 2017, outgoings recovery records for the financial year 2018 and the monthly turnover data for the period March to July 2017”.

(e)    Mr McNaughton and Mr Hamilton both “assumed the risk” that the information in the Tenant Arrears Report for July 2017 might not be accurate: J[163] and [164] read with J[166].

(f)    Elanor “did not examine the detail of this documentation and made no attempt to reconcile amounts charged with amounts paid”: J[165]. The trial judge stated at J[165] that Elanor could have, but did not, make a number of inquiries. His Honour’s observations included:

(i)    “The Savills records included detailed monthly reconciliations of amounts charged to and paid by each tenant and, although these documents were not made available in the data room, no request was made by Elanor or Mr Hamilton for the provision of this type of information”.

(ii)    “Moreover, through the question-and-answer facility in the data room, Elanor could have asked a simple question to the effect: Is the July Arrears Report a correct and complete statement of all rental arrears for each tenancy to 31 July 2017?”

(iii)    “Similarly, through that facility, Elanor could have sought clarification as to the difference between the print date and the last payment date on the July Arrears Report and the period to which it relates”.

(g)    This aside, there was “considerably more evidence to the effect that Elanor was not lead into error by the July Arrears Report because it took the risk that one or more, or indeed all, of the Food Court Tenants may be in arrears and may not ultimately be complying with their payment obligations pursuant to the leases or whether the Food Court Tenants were in arrears was immaterial to its decision-making”: J[166].

87    The reference to “considerably more evidence” is a reference to J[220] to [238] under the heading “The overall contextual circumstances”, in which his Honour considered the “context” in which the alleged misleading conduct occurred. In this section, the trial judge was also critical of Elanor’s lack of inquiry – see: J[226], [229], [235], [238].

Particulars (ii) and (iii) to [44(f)] of the FASOC

88    His Honour dealt with the second and third particulars to [44(f)] of the FASOC by stating:

[167]    The second Arrears Representation is pleaded as an implication: the circumstances in which the Tenant Arrears Reports were provided and the absence of any other document of a similar nature for different periods or tenants. This pleading is difficult to understand and was not elaborated upon in Elanor’s closing submissions. It does not add to the express representation said to be conveyed by the arrears reports and self-evidently the implication cannot be inconsistent with the objective meaning of those reports. In my view the implied representation contention takes Elanor’s case no further than the express representation case.

[168]    Thirdly, there is the oral representation claim that is founded on what Mr Shah said and did not say during the 30 August Meeting. As I have found, Mr Shah did not identify any of the Food Courts Tenant as having arrears of more than 30 days during that meeting, but it does not follow from that finding that his conduct was, in all of the circumstances, misleading or deceptive or likely to mislead or deceive, which point I return to later in these reasons.

Paragraph [46A] of the FASOC

89    The trial judge dealt with [46A] of the FASOC under the heading “Did the respondents engage in misleading conduct by non-disclosure?” from J[172] to [176]. The trial judge explained the case in the following way:

[173]    Paragraphs [19] to [26] of the FASOC concern the access granted by Elanor to the documents in the data room between 18 August and 15 September 2017, as well as the 30 August Meeting. The Tenant Arrears Reports for the period December 2016 to July 2017 are mentioned, and the July Arrears Report is emphasised. Paragraphs [35] and [36] reference provision of the October Arrears Report and the October incentive schedule provided to Elanor’s solicitor on 27 October 2017. As I have explained, the October documents are simply irrelevant to the decision-making of Elanor to enter into the Sale Contract, and no attempt has been made to lay out a case in the evidence as to what would have been done to end that contract in the event that relevant information had later been disclosed and that Elanor had been misled. Paragraph [40] is a reference to the passing base rent per annum in the tenancy schedule and to the outstanding incentive schedule, each as attached to the Sale Contract.

90    The trial judge rejected that case in one paragraph at J[174] stating:

[174]    Elanor fails to explain how these documents gave rise to a reasonable expectation that the fact of arrears of more than 30 days by any of the Food Court Tenants between December 2016 and October 2017, would have been disclosed to it. The fact is that Elanor had the benefit of the due diligence material and period of investigation, was itself a sophisticated investor and engaged Mr Hamilton as an experienced person in the undertaking of due diligence assessments, particularly for shopping centres. It was open to Elanor throughout the due diligence period to seek more documents and to ask specific questions. Relevantly, it did neither.

91    As to this, of course, Elanor had asked specific questions of Mr Frenil Shah on 30 August 2017, but was not informed that any of the Food Court Tenants were in arrears.

The principles

92    In Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; 97 ALJR 388 at [80] and [81], Kiefel CJ, Gageler, Gordon, Edelman and Gleeson JJ set out the four steps involved in determining whether a person has breached s 18 of the ACL. That case concerned representations to members of the public, but the steps are relevantly the same where the target audience is more confined. The steps are:

(a)    First, identifying with precision the “conduct” said to contravene s 18. The first step requires asking: “what is the alleged conduct?” and “does the evidence establish that the person engaged in the conduct?”

(b)    Second, considering whether the identified conduct was conduct “in trade or commerce”. There is no issue in the present case that the conduct was “in trade or commerce”.

(c)    Third, considering what meaning that conduct conveyed to its intended audience. Where the pleaded conduct is said to amount to a representation, it is necessary to determine whether the alleged representation is established by the evidence.

(d)    Fourth, determining whether that conduct in light of that meaning meets the statutory description of “misleading or deceptive or ... likely to mislead or deceive”, that is, whether it has the tendency to lead into error.

93    In relation to the third and fourth steps the High Court stated at [82] (footnotes omitted):

The third and fourth steps require the court to characterise, as an objective matter, the conduct viewed as a whole and its notional effects, judged by reference to its context, on the state of mind of the relevant person or class of persons. That context includes the immediate context – relevantly, all the words in the document or other communication and the manner in which those words are conveyed, not just a word or phrase in isolation – and the broader context of the relevant surrounding facts and circumstances …

94    It is wrong only to analyse the separate effect of each piece of conduct asserted to give rise to a representation without analysing whether the representation was conveyed by the whole of the conduct assessed in context: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; 149 CLR 191 at 199; Butcher v Lachlan Elder Realty Pty Limited [2004] HCA 60; 218 CLR 592 at [39] (Gleeson CJ, Hayne and Heydon JJ); Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640 at [52]. Examining only isolated parts of the conduct “invites error”: Butcher at [109] (McHugh J); approved in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 at [102].

95    Further, it is important not to confuse the conduct with that which the conduct is said to convey. References to representations should not obscure the need to identify the contravening conduct: Campbell at [102].

Consideration

Did the trial judge assess the conduct as a whole?

96    One of the complaints made by Elanor on the appeal was that the trial judge treated the particulars to [44(f)] as giving rise to separate representations or cases rather than assessing the conduct as a whole to determine whether that conduct conveyed the representations pleaded or was misleading or deceptive.

97    The pleaded representation alleged to have been conveyed by the conduct as a whole was that the Data Room Arrears Reports were a correct and complete statement of amounts which had not been paid in the relevant month to which the reports related. These were referred to as the “arrears representations”. The particulars to [44(f)] explained how the arrears representations were conveyed and, in part only, the conduct. The particulars explained that the representations were partly express and partly implied, the express aspect being partly written and partly oral. The principal conduct relied upon as giving rise to the arrears representations was the conduct pleaded in [19] to [26], [35], [36] and [40] of the FASOC.

98    Closely allied to the case pleaded in [44(f)] was the case, also said to flow from the conduct and matters pleaded in [19] to [26], [35], [36] and [40] of the FASOC, that Elanor had a reasonable expectation that Alceon and CPRAM would have disclosed any arrears of more than 30 days owed by any of the Food Court Tenants within the period December 2016 to October 2017 and that the failure to do so gave rise to a reasonable expectation by Elanor that none of the Food Court Tenants were in arrears for more than 30 days during that period: J[41]; FASOC [46A].

99    Elanor’s complaint that the trial judge treated the particulars to [44(f)] as giving rise to separate representations or cases finds support in the structure of the trial judge’s reasons. The trial judge addressed the “express representations” (a reference to the express written representations in particular (i) to [44(f)] of the FASOC) from J[155] to [166]. His Honour dealt with particulars (ii) and (iii) of the arrears representation as the “second Arrears Representation” at J[167] and the “oral representation claim” at J[168], respectively. His Honour addressed the claim of misleading conduct by non-disclosure separately at J[173] and [174]. His Honour later addressed contextual matters said to be relevant to whether the conduct was misleading at J[220] to [238], but much of this is in fact directed to questions relevant to reliance.

100    The complaint also finds support in the trial judge’s reasoning.

101    The trial judge stated in several places that he was required to assess the conduct as a whole and in context and also stated that it would be “an error to separately examine the effect of each representation or failure to disclose, without considering the conduct as a whole”: J[114], [120]. However, his Honour then analysed the particulars to [44(f)] individually as if they were separate “cases” or separate representations:

(1)    His Honour considered separately whether the pleaded representation arose from the Tenant Arrears Report of July 2017 (particular (i)). Whilst it is relevant to consider what the Tenant Arrears Report of July 2017 would have conveyed if viewed in isolation from the whole of the conduct, the real issue is whether the conduct as a whole conveyed the pleaded representation. What a document conveys when viewed in isolation is often different to what it conveys when viewed in context, including in the context of a course of conduct. His Honour did not consider each of the Data Room Arrears Reports. His Honour did not consider what the Data Room Arrears Reports conveyed when assessed against the respondents’ conduct as a whole.

(2)    His Honour found the “second Arrears Representation” to be “difficult to understand”, but that is because his Honour was addressing particular (ii) as if it was a stand-alone case giving rise to the pleaded representation. Particular (ii) was one of the matters relied upon as explaining how or why the pleaded representation was conveyed by the conduct as a whole. The conduct was principally pleaded in [19] to [26], [35], [36] and [40] of the FASOC and partly in [44(f)]. The trial judge addressed particular (ii) in one paragraph at J[167], where it was concluded that it “takes Elanor’s case no further than the express [written] representation case”. Neither was a separate case.

(3)    His Honour also dealt separately with “the oral representation claim” – that which Mr Frenil Shah stated at the meeting on 30 August 2017 – at J[168] as if it were a stand-alone case. However, particular (iii) identified conduct relevant to determining how the Data Room Arrears Reports would have been understood assessed in the context of the whole course of conduct. This was not the trial judge’s approach.

102    The focus on whether the “arrears representations” arose from one or other of the identified particulars in isolation does not furnish the answer to the questions involved in the first and third steps identified in Self Care at [80].

103    Further, the analysis of each particular to [44(f)] as if they were separate cases was not undertaken in the context of the conduct relied upon, namely the conduct pleaded from [19] to [26], [35], [36] and [40] of the FASOC.

104    Finally, it should also be observed that the trial judge’s approach to what was relevant as the “context” in which to assess whether the respondents breached s 18 of the ACL was more focussed on questions of reliance than on the context in which the respondents’ conduct should be assessed. The principal matters of “context” to which the trial judge referred was an asserted “assumption of risk” on the part of Mr McNaughton and Mr Hamilton and a failure on their respective parts to audit the records in the data room or make inquiries. The trial judge addressed reliance separately, but considered these matters persuasive in denying that the respondents’ conduct breached s 18 of the ACL. As will be explained further below:

(a)    the asserted “assumption of risk” proceeds on a misunderstanding of the evidence;

(b)    the trial judge’s reliance on a failure to audit the Tenant Arrears Report for July 2017, by reference to other business records of Savills contained in the data room, or make further inquiries:

(i)    involves the non sequitur that a failure to make inquiries means that misleading conduct is not misleading;

(ii)    involves the difficulty that his Honour later concluded that Savills’ records were “very messy” and unreliable such that the task his Honour hypothesised as one which should have been undertaken was in substance later found to be an impossible one; and

(iii)    ignores the fact that making inquiries is precisely what Mr Hamilton did by conducting a tenant-by-tenant review with Mr Frenil Shah on 30 August 2017.

105    For these reasons, and the further reasons given below, the trial judge’s assessment of whether Alceon and CPRAM breached s 18 of the ACL miscarried. Before returning to the trial judge’s reasoning in more detail, it is convenient to say something more about the Tenant Arrears Reports and the meeting of 30 August 2017.

The Tenant Arrears Reports

106    The Tenant Arrears Reports contained columns indicating whether the relevant arrears were 30, 60, 90 or 120 days overdue. Each was headed as relating to a particular calendar month. None of the Data Room Arrears Reports revealed any of the Food Court Tenants to be in arrears in any of the months.

107    It was Mr Hamilton’s practice to examine arrears reports as part of the due diligence exercise. It was his experience that monthly arrears reports showed the arrears as at the end of the month to which the report related: Hamilton 1 at [19(f)], [23(h)]; Hamilton 2 at [43]. This was also his understanding of the Tenant Arrears Reports produced by Savills: Hamilton 1 at [29], [30]. Mr McNaughton had the same experience and understanding: McNaughton 2 at [18]. Mr McNaughton made the observation that a monthly arrears report which takes into account payments made after the end of the month does not show the monthly arrears.

108    Indeed, Mr Hamilton’s understanding of what an arrears report usually shows accorded with Ms Hansen’s experience. Ms Hansen was an expert in financial due diligence called by the respondents. Her report included (emphasis added):

6.2.1.     With respect to ‘arrears reports’, in my experience:

(a)     ‘Arrears reports’ summarise outstanding debtors balances. Such reports may also be called the ‘aged receivable reports’ or ‘aging reports’.

(b)     Such reports would normally show debts based on the period for which each debt is outstanding. These categories usually include ‘current’ (i.e. debts that are due for less than 30 days) and those that are due past 30 days, 60 days, 90 days, and so on.

(c)     Such information would normally be shown as at the ending date of a period, i.e. a July 2017 report would show the outstanding amounts as at 31 July 2017.

…

11.2.1.     Paragraph 30 of Hamilton Affidavit states that:

“30.     I have reviewed both the July Arrears report and the December to June Arrears Reports. My understanding upon reviewing these reports is that they show what tenants were in arrears in that respective month. So for example, the July Arrears Report, I expect that to show what tenants had not paid as at the month of July as at the last day of that month (being whatever has not been paid during that month or any months prior).”

11.2.2.     I refer to my comments on the Tenant Arrears Report for July 2017 set out in Section 6 of this report.

11.2.3.     I agree with Mr Hamilton that, as an FDD advisor, I would expect an arrears report of July 2017 to show what tenants had not paid as at the last day of that month (i.e. 31 July 2017).

109    Ms Hansen also concluded, however, that there was information in the Tenant Arrears Report for July 2017 which indicated that it did not reflect the outstanding amounts as at 31 July 2017: at [2.4.3] and [11.2.5].

110    On careful examination, the Tenant Arrears Reports are ambiguous. They contain a reference to a “Last Payment” which, in some, refer to a date after the end of the relevant month. The arrears reports also contain a print date. By way of example, the Tenant Arrears Report for July 2017 refers to five tenants (none of which is one of the Food Court Tenants) and, in relation to each, refers to a “Last Payment” made after 31 July 2017 and before the print date of the July Arrears Report of 25 August 2017. Importantly, the arrears reports do not reveal whether, and if so how, the “Last Payment” has been taken into account in the statement of the arrears position for the month.

111    Further, it is not appropriate to confine the analysis to the Tenant Arrears Report for July 2017, which is what the trial judge did and what Ms Hansen appears to have done in expressing her views. For example, the Tenant Arrears Report for March 2017 and April 2017, in the data room, do not contain any “Last Payments” which post-date the relevant month.

112    It was entirely reasonable for Mr Hamilton (who only reviewed the Tenant Arrears Report for July 2017 at the time) and Mr McNaughton to have understood the Data Room Arrears Reports as stating what the arrears position was at the end of the relevant month. Mr Hamilton explained (Hamilton 2 at [43]):

I do not review arrears reports believing them to be inaccurate or do not otherwise record the arrears of the month in question. This does not change with the print date of the arrears report. The print date should not matter in assessing an arrears report for a specified month. I do not focus on the date of last payment recorded in the arrears report. I do not believe this to impact on the arrears recorded for a specific month, even if that last payment post-dated the month in question. I focus on whether there are 30 day arrears, or 60 day arrears, or 90 day arrears, or 120 day arrears. Further, a reference to the last payment does not to me, reflect what date the arrears are on the report. I expect a arrears report for a month to show arrears as at the end of that month.

113    As mentioned earlier, the trial judge overlooked that Mr McNaughton read each of the Data Room Arrears Reports. Mr McNaughton’s evidence was that, on 21 August 2017, he briefly reviewed the documents contained in the data room that referred to the Centre income, outgoings and documents in respect of arrears (which did not then contain the Tenant Arrears Report for July 2017): McNaughton 1 at [44]; AB2942.16 to 2943.14. Mr McNaughton accepted that his review of the arrears reports was brief: AB2942.37-42.

114    Both Mr McNaughton and Mr Hamilton reviewed the Tenant Arrears Report for July 2017 before the meeting with Mr Frenil Shah on 30 August 2017.

115    None of the Data Room Arrears Reports indicated that any of the Food Court Tenants had been in arrears. There was no other material in the data room reviewed by McNaughton or Mr Hamilton which indicated that the Food Court Tenants had been in arrears: Hamilton 1 at [26].

116    A part of the context in which Mr Hamilton went to the meeting with Mr Frenil Shah on 30 August 2017 included that he had reviewed the Tenant Arrears Report for July 2017 and other documentation in the data room and nothing he had reviewed indicated that any of the Food Court Tenants had been in arrears. If tenants were shown to be in arrears, then Mr Hamilton is likely, if not certain, to have raised this with the person representing the vendor who was familiar with the tenants (Mr Frenil Shah), and in his presentation to Elanor and in his due diligence report: Hamilton 1 at [31]. This was the effect of Mr Hamilton’s evidence.

Ground 1 of the respondents’ notices of contention

117    By Ground 1 of separate notices of contention, the respondents contended that the “arrears representations” were not made because the Data Room Arrears Reports stated the arrears positions of the tenants as at the dates the reports were printed, not as at the end dates of the relevant months to which each of the Data Room Arrears Reports related.

118    The trial judge was correct to conclude that the Data Room Arrears Reports were ambiguous. It was not clear that they stated the arrears position as at the print date. By way of example, the Data Room Arrears Report for February 2017 was printed on 21 June 2017 and stated a 30 day arrears position for an amount invoiced on 18 January 2017. If the amount remained unpaid, it could not have been only 30 days overdue.

119    Further, if the Data Room Arrears Reports reflected arrears as at the print date, then – on one view – the Tenant Arrears Reports in the data room for December 2016, January 2017, February 2017 and May 2017 – each of which was printed on 21 June 2017 – should have reflected, but did not reflect, the same overall arrears position. By way of example, the Tenant Arrears Report for December 2016 - printed on 21 June 2017 – showed Donut King to be $1,259.02 in arrears. The Tenant Arrears Reports for January 2017, February 2017 and May 2017 – each printed on 21 June 2017 – do not show any arrears for Donut King.

120    It has been noted above that both Mr McNaughton and Mr Hamilton understood the Data Room Arrears Reports to record the arrears position as at the end of the relevant month, not the print date. The assessment of what the Data Room Arrears Reports conveyed to a reasonable potential purchaser is not determined by what one of those reports (the July 2017 report) conveyed upon careful analysis to any accounting expert. On careful analysis of all of the reports, the Data Room Arrears Reports are ambiguous. For the reasons given earlier, if they stated the arrears position as at the print date, that is by no means clear. On any view, what is not ambiguous is that none of them conveyed that any of the Food Court Tenants had arrears between December 2016 and July 2017.

121    In any event, and most importantly of all, what the Data Room Arrears Reports conveyed was a matter to be assessed in light of the conduct as a whole in which respect Elanor relied upon the conduct and matters pleaded in [19] to [26], [35], [36], [40], [44(f)] and [46A].

122    Ground 1 of the notices of contention should be dismissed.

The 30 August 2017 meeting

123    In his first affidavit, Mr Hamilton gave the following evidence about the meeting and about his usual practice:

[35]    On 30 August 2017 after completing my review of the Data Room, I met with Mr Frenil Shah, the director of CPRAM at the Centre. In every due diligence I undertake I have a meeting of this kind. The purpose of meeting Mr Shah was to ask him questions about each of the tenants in the Centre so that I could ascertain from his answers if there are any tenants that warrant further investigation or are considered tenants that may be unable to pay rent or abandon their tenancy. In all due diligence investigations I conduct, I provide a summary of that information to the prospective purchaser, together with my opinion on the tenants based on that information.

[36]    Every other time I have conducted this type of due diligence for a tenanted asset, I conduct the meeting with the Centre Manager. I do this because they are usually located in the centre management office, are in contact with tenants on a daily or weekly basis, and observe the tenancy operating. The centre manager is the person that has most contact with the tenants and is most familiar with their rental payments and arrears position.

[37]    In this case on 22 August 2017, I was advised by Philip Gartland of Stonebridge (who was one of the sales agents for the property) that Frenil Shah from CPRAM would meet me on site for the meeting …

…

[39]    …[O]n 30 August 2017 I attended a meeting with Mr Shah of CPRAM. I took a tenancy schedule of the tenants with me to the meeting and went through the tenancy schedule as I ask questions about each tenant.

[40]    In this meeting I asked a series of questions about each tenant. I ask the same questions at all such meetings during a due diligence process. My practice is to ask the following questions:

(a)    Is [tenant] trading well or poorly?

I ask this question as it can indicate a tenant’s ability to pay rental and other charges, and possibly the length of time the tenant will stay leasing the premises. This is because, in my experience, if the tenant is trading well, it will receive sufficient income to make payment of its expenses including rental and other charges. Further, if it is trading well, it will likely stay in the lease for the duration of the lease and possibly renew the lease. If there is any adverse comment made in answer to this question I record that comment in my report to the prospective purchaser.

(b)    Is [tenant] in arrears or do they have a history of arrears?

I ask this question as it can indicate a tenant’s ability to pay rental and other charges, and the length of time the tenant will stay leasing the premises. If the tenant has a history of arrears or is in arrears at the time of the meeting, this can, in my experience, indicate the tenant may have future issues paying rental and other charges, and further may abandon the lease or not renew the lease once it has finished. If there is any adverse comment made in answer to this question I always include that in my report to the prospective purchaser.

(c)    Are there any issues with [tenant]?

I ask this question in addition to the two questions above to ensure I capture any other matters that may be of interest to the prospective purchaser but which are not directly related to payment of rent or sales made by the tenant. For example, if a tenant is disruptive in the shopping centre I expect to be told that. This is the type of issue I advise prospective purchasers about as I consider it a negative factor in respect of the purchase.

(d)    Has [tenant] requested more space or less space?

I ask this question because in my experience, it can, indicate whether a tenant is easily able to pay rental and other charges for the space it has leased. If a tenant has requested less space that can indicate it is finding it difficult to pay rental and other charges. This can show whether a tenant is likely to continue to pay its rental and other charges and stay for the duration of the lease. If there is any adverse comment made in answer to this question I always include that in my report to the prospective purchaser.

[41]    I also ask “what is the likelihood of [tenant] renewing their lease” in respect of tenants that are coming to the end of their lease i.e. are within six months of the end of their lease. I ask this because I consider that the longer a tenant remains in a tenancy (including renewing their lease), the more profitable the tenant is for the owner of the asset, as there are no periods where the tenancy is vacant and the owner is not receiving rent. In addition, in my experience it is common for tenants and landlords to enter into incentive agreements at the beginning of a tenancy by which the tenant pays less rent through various means, which equals less profit for the landlord. If there is any adverse comment made in answer to this question I always include that in my report to the prospective purchaser.

124    Mr Hamilton gave the following evidence about the preparation of the contemporaneous file note partially created before, and completed at, the meeting on 30 August 2017:

[42]    The meeting with Mr Shah took place in a coffee shop on 30 August 2017. Ms Brunninghausen and Ms Levene were also present at the meeting. No-one else was in attendance. Prior to the meeting, I said to Ms Levene words to the following effect:

“Can you please make notes of what is discussed in the meeting. Can you please write a heading for each tenant and if Mr Shah makes any adverse comment about any of the tenants please note down under the name of the tenant what he says. If he does not say anything adverse, just leave the space under the tenant blank”.

[43]    I asked Ms Levene to do this because I wanted to be able to speak to Mr Shah without stopping to make notes, but I wanted to ensure that we recorded any adverse comments about any of the tenants so I could include them in the due diligence report I was preparing for Elanor. I always include any comments from the meeting with the centre manager (or in this case, the asset manager) in the due diligence report which I consider would be of interest to the prospective purchaser. Those matters which I considered to be of interest are the matters set out above at 40-41.

125    Paragraph 44 of Mr Hamilton’s affidavit as contained in Part C of the Appeal Book included a note that it was “removed as received viva voce”. In his reasons, the trial judge noted that he had “required viva voce evidence to be adduced in relation to materially disputed conversations and events and to that extent the narrative contained in the affidavits made by the witnesses was not received”: J[134]. The transcript makes clear that evidence as to disputed conversations were “to be given viva voce and not adopted as part of the affidavit evidence” (AB2818.14; 2820.10; 2832.32; 3050.17-34). Paragraph 44 was rejected at AB3175.30.

126    The affidavit continued:

[45]    As we spoke, I observed Ms Levene typing into a document on her laptop computer.

127    Mr Hamilton gave evidence that he read the note after the meeting and that it was accurate:

[46]    Shortly after the meeting concluded, I read Ms Levene’s note. It was an accurate reflection of what was said at the meeting in particular by Mr Shah. Annexed and marked “AH6” [AB1581] is a copy of the typed note prepared by Ms Levene at that meeting and then reviewed by me. Where nothing is recorded in those notes about a particular tenant, I recall nothing adverse was said by Mr Shah for that particular tenant. If Mr Shah had said that a tenant was frequently in arrears or special arrangements were in place for a tenant’s rent or something else of a similar nature, I would have ensured that such comment was recorded in these notes. I always also pass those comments on to the prospective purchaser.

[47]    In the course of that meeting (or at any other time) Mr Shah did not raise any issues of concern to me as to the Food Court Tenants’ performance, or their ability to satisfy their respective rent and other obligations under their leases. I accepted that Mr Shah was giving an accurate summary of each of the tenants to me as I had no reason to think he was not being accurate.

[48]    Nothing in the material contained in the Data Room indicated to me that there had been any undisclosed forgoing of rent otherwise due to Alceon, that the Food Court Tenants were in arrears in payment of rental and other charges, had been in arrears in the past, or that the Food Court Tenants had indicated to Alceon that they were having difficulty with paying their rent.

128    Mr Hamilton was cross-examined in relation to [40] and [41] of his affidavit. This made clear that Mr Hamilton asked each of the four questions in [40] and the fifth question in [41] in relation to each of the tenancies. His evidence included (AB3231.14-22):

Now, so here – just coming back again, we’ve got 49 tenancies that you’re asking questions of from – about Mr Shah. And you’ve come along to this meeting, knowing you’re going to ask 49 questions, and you then ask questions – sorry, I withdraw that – and you say this meeting lasted for 30 minutes. Do you recall that?---Well, I – I can’t remember exactly but that’s an estimate.

But that’s what you said?---Yes.

So during this meeting, it’s your – your contention is that you went through every tenancy?---Yes.

You asked each of those four questions?---Yes.

And then you also asked another question, which is at paragraph 41, which I took you to, of your first affidavit?---Yes.

129    Mr Hamilton was challenged on whether he asked questions tenant-by-tenant (AB3227.21-36, emphasis added):

So what I’m suggesting to you – you wouldn’t have asked questions about this to Mr Shah during the course of the meeting because whether someone is trading poorly over a short period of time, according to you, is not indicative of any risk; isn’t that correct?---Again, I – I’m looking for the, sort of, anecdotal feedback. So if they’ve been open for six months, and they’ve told Mr Shah or the centre manager, “Look, it’s not going as well as expected”, or “It’s going way better than expected”, that would be interesting feedback to the question.

So is what you’re saying you asked this question about every tenant irrespective of how long they had been trading?---Well, I – I ask all the questions at the beginning, and then we go through tenant by tenant.

So you don’t ask the question in relation to each tenant. You ask a group of questions up front - - -?---Yes, yes.

- - - and then go in for each tenant?---Yes.

130    Mr Hamilton’s evidence included (AB3236.5-45, emphasis added):

… I suggest to you at the meeting that you didn’t go through each tenant one by one?---Well, we did go through each tenant one by one.

I’m suggesting to you that you didn’t ask Mr Shah whether each tenant was trading poorly?---No. As I said, that was the preamble. And then we went through and I would ask if there were any - - -

I suggest to you that you weren’t interested in historical arrears of any tenant – of the tenants at the centre?---In the historical - - -

Historical arrears history for the tenants at the centre?---Yes, I was. Yes.

All right. I will suggest you weren’t interested in the historical arrears of the new food precinct tenants - - -?---Yes, we were.

- - - at the meeting. Do you agree with that?---Sorry. Repeat the question.

I suggested to you at the meeting that you weren’t interested in determining the historical arrears of the new food court tenants?---Well, most of the food court tenants had only been trading for a month or two and they were under incentive deeds, so may not have been paying any rent.

So therefore - - -

HIS HONOUR: So do you agree with that, Mr Hamilton, that you weren’t interested in historical arrears?---No. If there were historical arrears. But if they’re very new tenants and they hadn’t started paying rent, there wouldn’t be any historical arrears. There wouldn’t be any arrears.

MR McQUADE: But did you have all that defined when you – which were those tenants when you went along to the meeting?---I think it’s obvious that, you know, if someone hasn’t been trading for very long or hasn’t even started paying rent, they wouldn’t have arrears. So - - -

So therefore, you agree that that’s not something you were interested in raising at the meeting with Mr Shah?---I was interested in it across the board for all the tenants. But if some of the tenants had only just started trading then I wouldn’t expect there to be a response.

And I suggest that you didn’t ask Mr Shah whether in respect to each tenant, there were any issues with the tenant?---Well, I suggest we did.

131    In his judgment, the trial judge noted that Mr Hamilton acknowledged his obvious difficulty in recalling the words used and the content of the discussion that occurred six years earlier: J[135]. At J[135], the trial judge set out the following part of the transcript (emphasis added; AB3151.6-41):

Yes?---So essentially, I would have said that – thank you for your time – for meeting with us. We’ve had about a week to go through the data room, and there’s a lot of information in there that we’ve already obtained. We’re not here to go over information that’s already in the data room. We’re trying to get some background to the numbers and the documents and, you know, anecdotal evidence of what’s going on in the shopping centre.

Yes?---And in order to do that, we would like to go through tenant by tenant and ask for your feedback on anything that you can – you know, that may be out of the ordinary or of interest, and I’ve given a few examples in the affidavit which – I haven’t got the right page in front of me but - - -

HIS HONOUR: No, no, no. I don’t want you looking at the affidavit. I want to just hear it in your own words?---Yes. So essentially, things like how are the tenants trading, do they have a history of arrears, do they need more or less space, are they likely to renew their lease when their lease expiry comes round – those are the sort of questions, and the idea is to give a few pointers of the sort of things we’re interested in, but what would normally happen is that that would draw out any other discussion points or points of interest. So - - -

MR FERNON: And you identified a number of matters, including are there any – I think you meant are there any arrears – are there any matters – do you recall, in answer to those questions, that you put what, if anything, Mr Shah said in respect of – now, when I say the food court tenants, do you – there’s nine tenants that have been the subject of your report. Do you know what I’m talking about?---Yes. Yes.

Do you recall what it was that Mr Shah replied to you when you went through each of those tenants, as you say, in respect of the food court tenants on those matters?---Well, I – we had one of my colleagues taking notes. There were no notes. My recollection is there was no information given unless it’s noted in that document of the record of the meeting.

When you say, “no information given” - - -?---Well, there might have been no issues would be a typical response.

Is it in response to the questions that you asked?---Yes.

132    The trial judge at J[136]:

(a)    accepted that Mr Hamilton was taken to the contemporaneous file note, prepared by Ms Levene, which Mr Hamilton confirmed accorded with his recollection of the matters discussed;

(b)    accepted that the document was pre-prepared and contained a number of headings corresponding to the various tenancies;

(c)    noted that, on Elanor’s case (which the trial judge accepted), if Mr Frenil Shah gave a response, the relevant response was recorded below the relevant heading. For example, in relation to Woolworths, there is a note that:

Sales are down due to other Woolworths opening nearby – an old Woolworths that was upgraded.

Never paid percentage rent – so rent unlikely to change at rent review in 2018.

133    The trial judge made findings which indicate that Ms Levene’s note was consistent with Mr Hamilton’s due diligence report of 18 September 2017: J[137], [138]. The due diligence report noted that Mr Hamilton met with “the asset manager”. In that part of the report dealing with the tenancy review, there was a reproduction of the information contained in the file note: J[138]. There was no reference to anything that Mr Shah said about the Food Court Tenants and there was no further mention in the document of any other information provided directly by Mr Shah at the meeting.

134    The trial judge stated:

[139]    Mr Hamilton was extensively cross-examined as to his recollection of the meeting. He accepted that although the turnover data and arrears reports for each of the Food Court Tenants between December 2016 and July 2017 was in the data room, he only looked at the July Arrears Report. He accepted that he knew by reference to the July 2017 turnover data that six out of 14 tenants in the food sales category had reported sales of three months or less to 31 July 2017. He was also aware that the turnover data which he examined was based on a projection to 1 December 2017. This evidence of Mr Hamilton provides context to his evidence-in-chief that his purpose in meeting Mr Shah was “to get some background to the numbers…anecdotal evidence of what’s going on…” understood by reference to the limited data that he had examined.

[140]    Mr Hamilton explained that he did not ask separate questions of Mr Shah relevant to trading performance for each tenant because he had that information from the reviewed documents and that is what he relied on. He would ask a generic question, designed to elicit anything extra from Mr Shah. He further accepted that when he asked questions concerning tenant arrears, he was seeking information as to the current position, not historic arrears, although later in his evidence he appeared to contradict this answer by insisting that he was interested in receiving information about historical arrears. He then qualified the answer in response to a question from me as to whether he was interested in historical arrears stating:

… No. If there were historical arrears. That if they’re very new tenants and they hadn’t started paying rent, there wouldn’t be any historical arrears. There wouldn’t be any arrears.

[141]    Mr Hamilton also denied the direct proposition that he did not ask Mr Shah whether there were any issues in respect of each tenant.

135    The first sentence in the emphasised passage from J[140] above contains a misunderstanding of Mr Hamilton’s evidence. Mr Hamilton did not accept that, when he asked questions concerning tenant arrears, he was only seeking information as to the current position, not historic arrears.

136    The relevant question put in cross-examination (to which the trial judge was referring at J[140]) was about [40(b)] of Mr Hamilton’s affidavit. In cross-examination, Mr Hamilton accepted the (obvious) proposition put to him that the first part of the question identified at [40(b)] of his affidavit was concerned with current arrears. The question at [40(b)] was: “Is [tenant] in arrears or do they have a history of arrears?”.

137    Mr Hamilton’s evidence was (AB3228.1-46, emphasis added):

Now, the next question [in paragraph 40 of your affidavit] then is the tenancy arrears reports or do they have a history of arrears. Again – sorry, I will withdraw that. The next question – subparagraph (b), you say, “Is tenant in arrears or do they have a history of arrears?” Now, your – when you say – correct me if I’m wrong. The question you’re directing to the person you’re speaking to – “Is the tenant in arrears?” – you’re asking about the date of the meeting, aren’t you?---Asking about - - -

Arrears at the date of the meeting?---Yes.

You’re not asking about historic – in that first part of it, you’re not asking about historical information?---No.

So “or do they have a history of arrears” – but you do have, as you’ve said, the July arrears report?---Yes.

138    In other words, Mr Hamilton’s evidence did not contain the inconsistency to which the trial judge referred at J[140].

139    Mr Hamilton’s evidence is properly understood as asking both about current and historic arrears, as would be expected both as a matter of probability and consistently with his usual practice.

140    The trial judge noted that Mr Frenil Shah also gave evidence as to what was discussed at the meeting on 30 August 2017. Mr Shah stated that the meeting lasted for between 60 and 90 minutes. Mr Shah accepted that Mr Hamilton phrased his questions by reading from notes: J[142]. In relation to Mr Shah’s evidence, the trial judge stated:

[144]    Turning to the specifics of the 30 August Meeting, he denied that Mr Hamilton at the outset stated that he intended to ask a series of questions in relation to each of the tenants. He denied that he was asked to comment on the trading performance of the tenants. He denied that he was asked about whether there was a history of tenant arrears. He denied that he was asked about whether tenants were likely to renew leases. He denied being asked questions in relation to each of the tenants listed in the file note of Mr Hamilton. Upon being taken to the file note, he said that he had made his own notes of the meeting but no longer had them. There is no reference in his affidavit evidence-in-chief to the fact of preparing any notes. He said that they existed in the form of a notebook that he had “probably” disposed of within two or three months of the meeting. He accepted that despite the absence of notes and the effluxion of time, nonetheless he had a detailed recollection from recall, not reconstruction, of the matters discussed.

[145]    He maintained that Mr Hamilton did not ask him direct questions in relation to the trading performance of each of the Food Court Tenants and responded that if he had done so, he would have referred Mr Hamilton to the material in the data room. The extent of Mr Shah’s recall of what was discussed at this meeting is highlighted by evidence that he gave in relation to a question about the floor area of a particular tenancy. Mr Shah stated that he had been asked to comment on the discrepancy between a survey plan area of 25m² and a statement on the tenancy schedule that the area was 27m². Objectively, this evidences an extraordinary ability on the part of Mr Shah to recall evidence about a discussion that occurred in August 2017 in minute detail and without the assistance of any contemporaneous note. This causes me to doubt his reliability.

141    The trial judge found Mr Hamilton to be impartial and reliable:

[146]    I have no hesitation in accepting Mr Hamilton as an objective witness of the truth who gave reliable evidence to the best of his recollection as to what was discussed at the 30 August Meeting with Mr Shah. From observation, Mr Hamilton was a careful and measured witness who Alceon accepts “was plainly a witness of the truth” and suffered from no partiality in the proceeding.

142    His Honour found Mr Shah to be unimpressive and evasive:

[146]    … In contrast, Mr Shah was an unimpressive witness who was not forthcoming in his evidence. I find that his evidence was not reliable where it conflicts with that of Mr Hamilton and with contemporaneous documents. On many occasions he avoided giving simple answers to direct questions, often requesting simply expressed questions be repeated. His evidence that he never looked at the monthly tenancy arrears reports, despite being included on the emails from Ms Coco which attached them, strains credulity: Mr Shah was the individual from CPRAM who had the primary responsibility for portfolio management of the Centre and with it performance of the agreement between Alceon and CPRAM. He also denied discussing the content of those monthly reports with Ms Coco, despite her evidence, which I accept, that she did so.

[147]    Mr Shah also gave unimpressive and incredulous evidence about an amount of $13,750 credited to the account of Dizzy Dukes on 20 April 2017, described as an unapplied receipt on the Tenant Arrears Report for May 2017. Mathematically, by reference to other business records, this sum represented a part payment of the security deposit of $41,250. The balance of $27,500 was paid on 20 April 2017. Despite being faced with this compelling evidence, Mr Shah insisted that the tenant had simply paid rent in advance – a proposition that sits uncomfortably with the fact that the incentive deed deferred the rent commencement date to 15 May 2017 and there were further deferrals, caused by the upgrading work, to 1 June 2017. Mr Shah’s evidence that $13,750 was a pre-payment of rent cannot be accepted in the light of the contemporaneous business records.

[148]    Overall, and by careful observation of the evidence of Mr Shah given over some hours, I formed the negative impression that he was unwilling to give evidence that he perceived contrary to the interests of the respondents.

143    At J[149], the trial judge concluded that:

(a)    Mr Hamilton asked questions of Mr Shah designed to elicit background information as to the operation of the Centre that was not apparent from the documentation disclosed in the data room.

(b)    Mr Hamilton commenced by asking a series of general questions relating to whether a tenant was trading, was there a history of arrears, whether more or less space was required and whether it was likely that a tenant would renew a lease.

(c)    For the Food Court Tenants, Mr Hamilton “did not receive any negative information, or at least information sufficiently material to be recorded in the notes of the meeting and included in his due diligence report”.

(d)    “Mr Shah did not identify any single Food Court Tenant as having outstanding rental arrears as at 30 August 2017”.

144    In substance, the trial judge accepted that, at the meeting on 30 August 2017, Mr Frenil Shah conveyed that the Food Court Tenants were not in arrears as at 30 August 2017.

145    To this, it should be added that Mr Hamilton was not told that any Food Court Tenant had a history of arrears.

146    The trial judge at J[149] accepted that Mr Hamilton asked general questions about a history of arrears. Once the trial judge’s misunderstanding of Mr Hamilton’s evidence at J[140] is corrected, there is no doubt that, in accordance with his evidence, Mr Hamilton asked about historical arrears. In this regard, Mr Frenil Shah conveyed that there was no relevant history of arrears or he was silent about any such history in a way which conveyed that there was no relevant arrears history.

The trial judge’s reasoning

147    There are three further aspects of the trial judge’s reasoning on whether Alceon and CPRAM engaged in misleading or deceptive conduct which warrant mention. The trial judge considered that a part of the “context” for assessing whether the respondents’ conduct was misleading was:

(a)    what his Honour saw as the fact that Mr McNaughton and Mr Hamilton each “assumed the risk” that the information in the Tenant Arrears Report for July 2017 might not be accurate: J[163] and [164] read with J[166];

(b)    the fact that Mr McNaughton and Mr Hamilton did not audit the Data Room Tenant Arrears Reports or make further inquiries; and

(c)    what the trial judge considered was the “overall contextual circumstances”.

148    These issues are better seen as matters relevant to whether damage was caused because of any misleading conduct, but they are addressed now because they formed a part of the trial judge’s reasons for concluding that the conduct itself was not misleading.

Assumption of risk

149    As to Mr McNaughton’s “assumption of risk”, the trial judge reasoned as follows at J[163] (emphasis added):

[163]    In cross-examination, Mr McNaughton was taken in detail to various sub-clauses contained in the special conditions of the Sale Contract at cl 5 … His attention was directed to the buyer acknowledgement to the effect that the seller “makes no representation or warranty as to the accuracy or otherwise” of the due diligence material, that the seller has not conducted its “own independent inquiries and investigations into information in the due diligence material prepared by third parties” and that the buyer warrants that it has “examined and satisfied itself” in relation to all matters contained in the due diligence material. It was then directly put to Mr McNaughton that Elanor accepted the risk as to whether or not the information prepared by Savills [including the Tenant Arrears Reports] was reliable or alternatively accurate to which he answered [AB3070-3071]:

…. We accepted the risk. No. We were working on the assumption that it was accurate.

That’s right. So if it wasn’t, you are accepting the risk that it wasn’t? --- I guess so. Yes.

…

Mr McNaughton, Elanor could have, if it chose to do so, could have undertaken a due diligence of the accuracy of the financial information or material that Savills had regarding the Centre? --- If time, cost and industry practice permitted, then – yes.

But you didn’t even turn your mind to that, did you? --- No.

150    Understood fairly, Mr McNaughton’s evidence was to the effect that: (a) he relied on the accuracy of the reports which Savills prepared (which included the Data Room Arrears Reports) – that is, he was “working on the assumption that it was accurate”; (b) he accepted that the terms of the Sale Contract had the effect that Elanor accepted the contractual risk that the due diligence material was not accurate.

151    There is nothing surprising about assuming that the Data Room Arrears Reports were accurate, those being business records which Savills created in order to manage the Centre. As the trial judge recorded at J[162]:

[162]    … According to Mr McNaughton: “Savills is a globally recognised and reliable property management company. Its existence in managing the Centre was a form of primary audit that I considered Elanor could rely upon.” His evidence then continued:

…[I]n my experience, when documents, reports or ledgers for instance are generated by property management software system of a globally renowned company such as Savills, it is assumed that those documents, reports or ledgers are reconciled and cross-checked with other relevant documents, reports or ledgers in that system. Accordingly, in my experience it is reasonable to take those documents, reports or ledgers at ‘face-value’ and not take steps verify [sic] the source documents that those documents, reports or ledgers were based upon.

152    As to Mr Hamilton, it is unclear what the trial judge had in mind in stating that Mr Hamilton “assumed the risk” that the information in the Tenant Arrears Report for July 2017 might not be accurate. In his affidavit at [29], Mr Hamilton stated (AB360):

I did not undertake, and was not asked to undertake, a forensic accounting investigation of the Centre. Given the manager for the Centre was Savills, a globally recognised manager of commercial properties, and given the substantial nature of the asset being sold, I placed considerable trust in the accuracy of the documentation provided and the information contained in it, such that an audit of its contents was not required.

153    Mr Hamilton was taken to this in cross-examination and was not challenged on it: AB3190-91.

154    Mr Hamilton also stated in his second affidavit at [33]:

[33]    [G]iven the medium to large sized institution owning the Centre and the involvement of Savills, there is a significant level of trust in the accuracy and completeness of the documents provided. I assume that other information provided orally or in writing by the vendor’s representative is accurate and correct. I take the documents and information that I am provided with from the vendor at face value, so that I do not need to conduct an investigation into the documents and information itself as to whether it is accurate. There may be mistakes in the documents produced or discrepancies. For example, in this particular due diligence there were some minor discrepancies in the tenancy schedule compared to various leases. But if an arrears report does not show tenants to be in arrears, I expect that information to be correct. I do not expect to have to cross check such information that is provided to me.

155    Mr Hamilton made clear in his evidence in cross-examination that he relied upon the Tenant Arrears Report for July 2017: AB3216.40. He gave evidence that he generally assumed that tenants in shopping centres were up to date with their rent if there no reason to think otherwise: AB3217.30.

156    It follows that the trial judge’s conclusion that Mr McNaughton and Mr Hamilton “assumed the risk” that the information in the Tenant Arrear Report for July 2017 might not be accurate was not supported by the evidence.

Failure to audit and make inquiries

157    As noted earlier, the trial judge was critical of Elanor, stating that Elanor “did not examine the detail of [the] documentation and made no attempt to reconcile amounts charged with amounts paid”: J[165]. The trial judge stated at J[165] that Elanor could have, but did not, make a number of inquiries.

158    There are three problems with this reasoning. First, as a matter of principle, the question was whether the respondents engaged in misleading or deceptive conduct, not whether further inquiries might have revealed the true position. The content of the data room, including the Data Room Arrears Reports, and Mr Frenil Shah’s conduct conveyed that the Food Court Tenants were not, and had not relevantly been, in arrears. It is no answer to conclude that, if further inquiries had been made, Elanor might have discovered that the position was otherwise. As Lockhart J stated in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 558, to which Elanor referred:

It is no answer to say that Collins Marrickville should have made its own inquiries and that, if it had done so, it would have found out the true position: see Redgrave v Hurd (1881) 20 Ch D 1 per Jessel MR at 14 and 17; per Baggallay LJ at 23, in the context of the equitable right to rescind for innocent misrepresentation. It is true that Mr Collins recognised the importance of verifying the material given to him by Mr Le May about the seating capacity of the restaurant and that, had his solicitor done what he should have done, the true position would have emerged and the sale probably would not have proceeded. But these circumstances did not negate the duty to disclose which the circumstances otherwise imposed.

159    The same point was made by McHugh J in Butcher at [111], to which Elanor also referred:

Conduct is misleading or deceptive if it induces or is capable of inducing error. A corporation does not avoid liability for breach of s 52 because a person who has been the subject of misleading or deceptive conduct could have discovered the misleading or deceptive conduct by proper inquiries. Conduct that objectively leads one into error is misleading.

160    That is not to say that the ability to make inquiries is necessarily irrelevant to the question of whether conduct is misleading in all situations. The difficulty is that the trial judge’s reasoning, fairly understood, was that the respondents’ conduct was not misleading or deceptive because, although it conveyed something which was incorrect, the true position could have been discovered (according to the trial judge) on further inquiry.

161    Secondly, the expert evidence on the topic of whether there were in fact arrears in rent revealed that the underlying records furnished no easy answer. When the trial judge came to consider whether there were in fact arrears in rent, the trial judge considered that Savills’ records were “very messy” (a description given by one of the experts who sought to reconcile the records): J[196].

162    It is clear that, in the due diligence time available, Elanor could not have audited the arrears reports. It took experts considerable time and expense to attempt to determine what they considered to be the true arrears position on the basis of certain assumptions, a matter acknowledged by the trial judge at J[191].

163    As will be seen later, the expert who sought to reconcile the relevant records (Mr Hellen) could not undertake the task without reliance on unsubstantiated annotations made on those records by Mr Neil Shah and without making a number of assumptions. Further, in some respects the conclusions of those experts were inconsistent with contemporaneous business records the reliability of which could not seriously be doubted. Further still, the experts could not agree on all issues even on the basis of the various assumptions made. The trial judge’s treatment of Savills’ business records on the topic of the true arrears position of the Food Court Tenants, is difficult to reconcile with his conclusion that, during due diligence, Elanor should have attempted to reconcile amounts charged with amounts paid or could have undertaken that exercise with any meaningful result.

164    Third, Elanor did make inquiries, by Mr Hamilton. Mr Hamilton conducted a tenant-by-tenant review with the person most likely to know the detail of how tenants were faring, namely the “asset manager”, Mr Frenil Shah, on 30 August 2017.

165    Elanor’s case was that the Data Room Arrears Reports, in particular the Tenant Arrears Report for July 2017, did not show that any of the Food Court Tenants were in arrears. When Elanor, by Mr Hamilton, conducted its tenant-by-tenant review with Mr Frenil Shah on 30 August 2017, it was either told that there were no arrears or no relevant arrears were identified. Perhaps Elanor could have found out the true position if it conducted an audit along the lines of that later conducted by forensic accounting experts. That fact, even if true, does not mean that the respondents did not contravene s 18(1).

The “overall contextual circumstances”

166    As noted earlier, the trial judge referred at J[166] to there being “considerably more evidence to the effect that Elanor was not lead [sic] into error by the July Arrears Report because it took the risk that one or more, or indeed all, of the Food Court Tenants may be in arrears and may not ultimately be complying with their payment obligations pursuant to the leases or whether the Food Court Tenants were in arrears was immaterial to its decision-making”: J[166].

167    The trial judge addressed this evidence under the heading: “The overall contextual circumstances”: J[220] to [238]. His Honour considered that there was “considerable evidence that Elanor took the risk that the Food Court Tenants, individually or as a group, may fail”: J[221]. There are two significant issues with the analysis that follows.

168    First, the trial judge was critical of: (a) the level of inquiry which Elanor undertook; and (b) the fact that Mr McNaughton assumed that Savills records were accurate. His Honour considered that this was important context to the question of whether the respondents had engaged in misleading or deceptive conduct. For example, his Honour stated:

[226]     … Elanor was provided with access to the data room, together with the question-and-answer facility through which it, and its advisors, could ask specific questions in the event that the information provided was considered insufficient, or ambiguous. No relevant additional questions were asked in relation to the conduct that is claimed to have been misleading or deceptive. Mr McNaughton accepted that he was aware that in the establishment of the content of a data room, the first step required is that the vendor assesses what categories of documents will be included and the time period. Mr McNaughton was aware that additional documents could be requested, as was Mr Hamilton. No relevant requests were made.

…

[235]    Further, as I have found, Mr McNaughton assumed the accuracy of the Savills records, and in particular the July Arrears Report. He chose not to undertake any due diligence as to the accuracy of the data contained therein.

…

[238]    It is also the case that the July Arrears Report and the failure of Mr Shah to disclose any tenancy arrears for Food Court Tenants, must be viewed against the considerable amount of information that was made available to Elanor during the due diligence period. Access was provided to the tax invoices, which, had they been examined, would have disclosed that there were no tax invoices for Dizzy Dukes, Kebab Express, Mumbai Blues and Redcliffe Noodle Kitchen and that only Burrito Bar, Bel Cibo and Sushi Kuni had been charged rent for May 2017. That information was inconsistent with the deferred dates for the commencement of these leases in accordance with the incentive deeds. Examination of this material would have put Elanor on further inquiry. Questions could have been asked; for example, as to why this discrepancy existed and more specific questions could have been asked about rental arrears. The monthly tenancy schedules, which reported whether the tenants had commenced to trade and if so when, as I have found, objectively conveyed that these tenants, together with Burrito Bar and Thai Me Down had either not commenced to trade in accordance with the deferred lease commencement dates in the Incentive deeds, or had commenced trading later than as provided for in those deeds. It also disclosed the limited trading activity for these tenants.

169    This analysis, particularly at J[235], ignores the fact that Elanor did make further inquiry. It inquired of the very person most likely to know whether the tenants were in arrears or had a history of arrears, Mr Frenil Shah. If Mr Frenil Shah had stated that there were issues, then no doubt Mr Hamilton would have conducted further due diligence to ascertain the extent of the issues.

170    Secondly, much of the trial judge’s analysis of “context” is in fact an analysis of whether or not Elanor relied on the misleading or deceptive conduct, a topic which his Honour also separately addressed from J[247] to [272].

171    As mentioned, his Honour considered that there was “considerable evidence that Elanor took the risk that the Food Court Tenants, individually or as a group, may fail”: J[221]. His Honour referred in this regard to the Information Memorandum emailed to Mr McNaughton on 2 May 2017:

[221]    I begin this part of my analysis with whether the representations were likely to lead Elanor into error? There is considerable evidence that Elanor took the risk that the Food Court Tenants, individually or as a group, may fail. The commencing point is the Information Memorandum that was emailed to Mr McNaughton on 2 May 2017. It makes express reference to the casual dining precinct floorplan. It provides an explanation of the work that Alceon “is undertaking” by way of improvement to the casual dining area, that a range of food court operators “have been secured” and that the upgrade was expected to be completed in May 2017, with the new retailers expected to be trading by the end of June 2017. Mr Hamilton emphasised each of those facts in his due diligence report and went considerably further. He noted that there were five vacancies based on the tenancy schedule forecast to 1 December 2017. He specifically noted as a threat to the trading performance of the new external restaurant precinct, that it was unproven and that it remained to be seen if it would provide “the hoped for increase in sales and customer traffic”. He included an analysis of tenancies at risk, including Sushi Kuni. His report attaches a tenancy schedule analysis as at 1 December 2017. It is based on estimates.

172    As noted earlier and as further discussed below, the conclusion that Mr McNaughton and Mr Hamilton “took the risk” that the Food Court Tenants might fail proceeds at least in part on a misunderstanding of the evidence. The matters in J[221] are more relevant to reliance than “context” and, in that regard, the question which is not answered is what Mr Hamilton would have said in his due diligence report if Mr Frenil Shah had given information which was properly responsive to the inquiries which Mr Hamilton made on 30 August 2017.

173    The trial judge then referred to the “updated financial figures” provided on 2 August 2017. In this respect, the trial judge stated:

[222]    Mr McNaughton received a set of updated financial figures by email on 2 August 2017 from Stonebridge. That document makes it clear that four out of the nine Food Court Tenants had not reported sales for the reason that they had not commenced to trade. Five of the Food Court Tenants there recorded had not commenced trading either in May or June 2017 and there is a notation for one that disruption was caused by fit out works. For two, it is noted that the trading period was very brief, either 12 or 14 days of actual trading from which a monthly projection had been prepared. A further document supplied on that day comprised the updated financial summary of the Centre overall with figures forecast to 1 December 2017, including a forecast for the updated total passing net operating income of $3,907,170. Elanor well knew that this was a forecast figure, based on estimates and for that reason might not have been achieved.

174    It may be accepted that Elanor knew that the information provided on 2 August 2017 was an estimate. The fact that forecasts had been provided is relevant context to the questions raised by Mr Hamilton at the meeting on 30 August 2017, but the trial judge does not appear to be addressing the matter for that purpose. Rather, the trial judge appears to be addressing the question of reliance. The same may be said about the email from Colliers received on 28 August 2017 which indicated that the Centre was quiet when Colliers had visited: J[223].

175    The trial judge noted that Mr Hamilton accepted in cross-examination that it may take up to 12 months of trading performance to determine whether a newly opened food court tenant was at risk, and that it is very hard to tell from “a couple of months trading figures” whether a newly opened food court tenant would subsequently be at risk: J[224]. The trial judge noted that “Mr Hamilton accepted that trade data was available in the data room when he undertook his due diligence, and that it disclosed that six out of 14 tenants in the food catering category had sales of three months or less” and that Mr Hamilton “was aware that the upgrade of the casual dining precinct was anticipated to be complete either in May or June 2017”. It might be noted in this regard that Mr Hamilton was retained in August 2017. The trial judge continued at J[224]:

[Mr Hamilton] accepted that it is very common for building works to be delayed, and that explains why a tenant can be given a rent-free period. Importantly he accepted that he could not identify whether a tenant was at risk of falling into subsequent arrears from one or two months of figures. He said: “it’s very hard to tell from a couple of months” and that it may take up to one year to make a judgment on that question.

176    The trial judge contrasted Mr Hamilton’s evidence with Mr McNaughton’s evidence, which he rejected: J[225] to [228].

177    This evidence is relevant context to why Mr Hamilton asked the questions which he did on 30 August 2017 , but the trial judge does not explain why the evidence suggests that the relevant conduct was not misleading or deceptive. Rather, the trial judge appears to be addressing the question of reliance.

178    The trial judge was critical of Mr McNaughton’s “haste” in putting forward the proposal to purchase the Centre. His Honour considered this “clearly a relevant contextual matter in assessing whether the conduct of Mr Shah in not identifying any of the Food Court Tenants as being in arrears at the 30 August Meeting was objectively misleading or deceptive”. His Honour stated:

[230]    The discussion between Mr McNaughton and Mr Baliva occurred on, or shortly before, 8 September 2017, prior to conclusion of the due diligence period and without the benefit of Mr Hamilton’s completed due diligence report. He did so having had the benefit of his discussion with and an oral report from Mr Hamilton on 6 September 2017. What is apparent, is that Mr McNaughton was determined to “press ahead” with the making of a formal recommendation to Elanor’s board to acquire the Centre, without being in receipt of the finalised due diligence report from Mr Hamilton. The same observation applies to the finalised valuation report of Mr Kwan which was not provided to Mr McNaughton until 28 September 2017, although I accept that as early as 7 September 2017 Mr Kwan had provided draft calculations to Mr McNaughton. That does not, however, detract from the haste with which Mr McNaughton proceeded to finalise a recommendation to the board for Elanor to acquire the Centre for a very substantial price which is clearly a relevant contextual matter in assessing whether the conduct of Mr Shah in not identifying any of the Food Court Tenants as being in arrears at the 30 August Meeting was objectively misleading or deceptive and whether that conduct in combination with the ambiguous nature of the July Arrears Report was misleading or deceptive.

179    It is not clear why Mr McNaughton’s “haste” to put a proposal to Elanor’s board provides any context at all to “whether the conduct of Mr Shah in not identifying any of the Food Court Tenants as being in arrears at the 30 August Meeting was objectively misleading or deceptive”.

What was the conduct and what did the conduct convey?

180    The first step was to identify the relevant conduct: Self Care at [80]. A representation should not be confused with the conduct giving rise to the representation. As noted earlier, the “arrears representations” were said to arise by reason of the conduct and matters pleaded in [19] to [26], [35], [36] and [40] of the FASOC and in part in [44(f)]. In simple terms, the relevant conduct was:

    Alceon and CPRAM providing Elanor and its representatives access to a data room for the purpose of enabling Elanor to undertake a due diligence process in relation to the Centre: [19(a)] of the FASOC.

    Elanor and its representatives being provided access as part of the data room to the Data Room Arrears Reports, sourced from the MRI Management System kept by Savills, from December 2016 to July 2017: [19(c)], [20], [21] of the FASOC.

    The Data Room Arrears Reports provided by Alceon and CPRAM not identifying any of the Food Outlets as being in arrears for the period from December 2016 to July 2017 for any amount: [22], [24] of the FASOC.

    No other Tenant Arrears Reports nor any other documents being provided which recorded arrears in respect of the Food Court Tenants for the period from December 2016 to July 2017: [23] of the FASOC.

    On 30 August 2017, Mr Shah not identifying any of the Food Court Tenants as having arrears or any issue in respect of their respective sales or their ability to pay rent when asked questions by Mr Hamilton: [26] of the FASOC.

181    The trial judge did not approach the case in this way, instead addressing the particulars to [44(f)] of the FASOC as separate cases. Further, the trial judge incorrectly focussed only on the Tenant Arrears Report for July 2017. Mr McNaughton had read all of them.

182    The third step was to identify what meaning the conduct conveyed: Self Care at [80].

183    The conduct viewed as a whole, including what was not said, conveyed that there was no relevant history of arrears on the part of the Food Court Tenants:

    the Data Room Arrears Reports, including the Tenant Arrears Report for July 2017, did not indicate that any of the Food Court Tenants had arrears in rent;

    there was no other document in the data room which identified any arrears of rent;

    on 30 August 2017, Mr Frenil Shah represented (either expressly or through silence) that the Food Court Tenants had neither current arrears nor a relevant history of arrears.

184    Assessed in the context of the whole of the conduct, and accepting that in isolation they were capable of various different interpretations, the Data Room Arrears Reports conveyed that none of the Food Court Tenants had arrears in any month from December 2016 to July 2017. This is the essential point made in the FASOC and it is the way in which the case was conducted. As the trial judge recorded at J[30]:

[A] primary contention of Elanor (opened on its case), is that the Tenant Arrears Reports “did not identify any of the [Food Court Tenants] as being in arrears for any amount” and further that no other arrears report nor any other documents were provided which recorded tenancy arrears between December 2016 and July 2017, save for the report of July 2017 which recorded total arrears in that month of $2,957.05 for five tenancies that are not the subject of complaint by Elanor.

What were the rent arrears?

185    Elanor’s case was that from December 2016 to 1 November 2017, the tenants of the Food Court were, from time to time, in arrears paying their rent: FASOC [42]. Extensive particulars were provided in relation to each of the nine tenants. The particulars were supported by extensive business records referred to in McNaughton 1 at [99] to [221]: J[43] and [184]. The trial judge, however, proceeded principally by reference to a joint expert report, stating at J[184]:

[184]    … Fortunately, I am relieved of performing the tedious and time-consuming task of individually reconciling those documents to make findings of fact, as two accountants have undertaken a reconciliation and produced a joint expert report. Despite that report, in certain aspects, Elanor invites interrogation of some of the underlying documents which, on its submission, do not establish some of the assumptions made by the respondents’ expert, Mr Hellen and to that extent submits that findings should be made in accordance with the source documents.

186    The respondents jointly engaged Mr Hellen to undertake four reconciliations and to consider and comment upon the extent to which any of the Food Court Tenants were in arrears in the period from December 2016 to October 2017: J[185] and [186].

187    Mr Gwynne was engaged by Elanor to review and comment upon the rental arrears calculations and analysis of Mr Hellen, but not to undertake an independent reconciliation: J[189]. Mr Hellen and Mr Gwynne attended a joint expert conclave before a Registrar of the Court and produced a joint experts’ report dated 30 June 2023: J[190]. They also gave concurrent evidence at trial. There was no order to the effect that this joint expert report replace earlier reports or that the question of what the rental arrears of any given Food Court Tenant at any given time be assessed solely by reference to the joint report.

188    In preparing his report, Mr Hellen was instructed to make certain assumptions. The trial judge explained at J[188] that some of these were controversial:

[188]    Mr Hellen was instructed to make certain assumptions which are controversial and which arise from his analysis of the end of month MRI reports together with copies of bank statements. As explained by Mr Hellen, in order to allocate cash receipts to tenant accounts he relied upon certain comments, in the form of annotations to the documents, applied by Mr Neil Shah which identified and allocated various receipts. Mr Neil Shah did not give evidence and the submission of Mr Fernon is that I should not make findings of fact that rest on those untested assumptions where there is a dispute.

189    Mr Neil Shah’s annotations were not rejected, the trial judge expressly preserving Elanor’s right to submit (as it did) that they were unproven assumptions: AB3530.43. The trial proceeded, in substance, on the basis that the notations were an aid-memoire only: AB3531. However, in the judgment, and notwithstanding Elanor’s submissions (some of which, as discussed below, were not entertained) the trial judge preferred Mr Hellen’s conclusions even when those conclusions were based partly or wholly on Mr Neil Shah’s annotations. This was to treat Mr Shah’s annotations as more than an aide-memoire. No reasons were given for adopting this course.

190    The trial judge noted that Elanor relied on the evidence of Ms Coco together with the documents referenced in McNaughton 1 at [99]-[220]: at J[212]. His Honour noted that the documents included individual tenant ledger accounts, emails between Food Court Tenants or their representatives and persons responsible for the management of the Centre, the Discovered Tenant Arrears Reports, the Savills receivables ledger and correspondence sent by Savills to various tenants in relation to the asserted arrears position. His Honour noted that Elanor contended that this documentation comprised “financial records” within the meaning of s 286 of the Corporations Act 2001 (Cth) which pursuant to s 1305 have prima facie evidentiary status: at J[212].

191    The trial judge accepted “that individual tenancy receivables ledgers are financial records within this provision, together with the tenancy arrears reports”: J[214]. However, his Honour did not accept that correspondence between Savills and individual tenants relating to asserted rental arrears, claimed payments and requests for extensions were financial records. His Honour noted that the evidence of Mr Hellen, portions of which were agreed by Mr Gwynne, included evidence to the effect that the Savills Tenant Arrears Reports and individual tenancy receivables ledgers contained material errors: J[215]. His Honour accepted the evidence of Mr Hellen, “who succinctly summarised by his overall comment that the Savills accounts ‘are very messy’”: J[216]. His Honour concluded “that the prima facie evidence status of the Savills records as comprising financial records, is displaced”.

192    The trial judge did not reject any of the documents on which Elanor relied, most of which comprised admissible business records.

193    It does not follow from the trial judge’s rejection of the “prima facie evidentiary status of some of the Savills documentation” (being a reference to s 1305 of the Corporations Act) that each and every business record was unreliable or could be ignored or that each and every transaction recorded in them was unreliably recorded. Indeed, the expert evidence proceeded on the basis that the majority of the individual entries in the Discovered Arrears Reports were correct, for example, the imposition of the various charges and the recording of a great many of the payments made.

194    Elanor provided a detailed submission (Arrears Schedule) identifying what it claimed were errors in Mr Hellen’s analysis. It did so by reference to the evidence, including the contemporaneous business records. The trial judge accepted Mr Hellen’s evidence (based in part on the untested hearsay notations made by Mr Neil Shah), rejected the “prima facie evidentiary status of some of the Savills documentation” and stated that it “follows” from those two matters that his Honour “reject[ed] Elanor’s submission that [he] should go behind entries in the joint expert report, accept components of the evidence of Mr Gwynne or otherwise have regard to and make findings in accordance with the Arrears Schedule analysis prepared by counsel”: J[217]. That is, his Honour did not consider Elanor’s submissions or case in this respect.

195    The trial judge’s reasoning at J[217] suffers three problems:

196    First, the reasoning involves accepting Mr Hellen’s evidence as correct and using that acceptance as a basis for refusing to “have regard to” the submissions as to why Mr Hellen’s evidence should not be accepted. This is illogical.

197    Secondly, the business records were admissible and admitted into evidence. The fact that the business records may have contained some errors was not a reason for refusing to have regard to any of them or for rejecting the probative value of all parts of those business records.

198    Thirdly, substantial parts of Mr Hellen’s opinion were based entirely or partly on Mr Neil Shah’s annotations. Those annotations, which included allocations of cash receipts, were hearsay and should have been rejected where reliance on them was controversial. No consideration was given to the possible admissibility of the annotations through any exception or relieving provision. The annotations were controversial and it was unfair to allow them into evidence in circumstances where Mr Neil Shah, a junior analyst, was not to be called to give evidence. This was particularly so where some of the annotations were inconsistent with, or not supported by, the business records – see, for example, the discussion in relation to Bel Cibo, below. The absence of evidentiary support for Mr Neil Shah’s annotations, and the inconsistency of his annotations with some of the business records, furnished a reason not to accept the relevant annotations as being either accurate or reliable, but this was not considered by the trial judge, in part because the trial judge did not consider the submissions in the Arrears Schedule: J[217]. If Mr Neil Shah had been called to give evidence, the inconsistencies between the annotations and the contemporaneous business records could have been explored. This, coupled with the refusal to entertain cogent submissions based on contemporaneous business records, unfairly resulted in Elanor’s case on this important issue not being entertained or properly addressed.

199    This breach of procedural fairness is not rescued by the fact that the two witnesses agreed that the differences between them were summarised in schedules. First, it is the parties, not witnesses, who define the issues. Secondly, the schedules referred to other parts of the evidence and could not be understood in isolation. Thirdly, evidence had been given during the trial by other witnesses which was relevant to the issues. Fourthly, Elanor submitted to the trial judge, correctly, that the issues could not be resolved only by reference to the schedules prepared by Mr Hellen and Mr Gwynne.

200    It was submitted for the respondents that the matters in the Arrears Schedule should have been put to Mr Hellen and Mr Gwynne. The matters raised in the Arrears Schedule were either put to them or otherwise plainly in issue. The respondents have not identified any submission in the Arrears Schedule as one which should have been, but was not, put to the witnesses, nor explained why the matter was one which should have been put to them.

201    Before turning to the arguments which Elanor sought to advance through its Arrears Schedule, it is appropriate to say something about Mr Hellen’s methodology. Mr Hellen was provided with a “CM Receivables Ledger” (CMR) for the period from December 2016 through to October 2017, which recorded that, by 31 October 2017, only Burrito Bar had an outstanding balance of $11,022.85: AB2210 – 2218; AB232.

202    In October 2017, Mr Frenil Shah was focussed on bringing the arrears positions of the various tenants to zero, in light of Alceon’s ownership coming to an end. Mr Frenil Shah’s evidence (partly limited to his understanding) included (Shah 1 at [115]):

Post exchange, in the lead up to completion of the sale to Elanor, I was focused on clearing all arrears. This is because rent for periods prior to completion are funds which rightly belong to Alceon. However, I understood pursuant to the terms of the sale contract, any arrears not collected by 31 October 2017 would be foregone. I wanted to ensure that Alceon received all money it was entitled to before completion. For example, I would not normally care if by the 21st day of the month a tenant had not paid their rent for that month, but in September and October 2017, I did.

203    However, what was not available was Savill’s EOM Report (or Tenant Arrears Report) for October 2017. As will be explained further below, Mr Hellen had to assume payments were made, and make assumptions about when they were made, in order to ensure the CM Receivables Ledger for each tenant balanced – that is, equalled zero by 31 October 2017 – for all tenants other than Burrito Bar. One criticism advanced by Elanor at trial was that amounts were allocated in months earlier than October 2017 when, having regard to Mr Frenil Shah’s evidence, it was more likely that the amounts would have been received in October 2017. Whether or not this is in fact what happened could not be positively established by reason of an absence of sufficient information.

204    There were significant limitations in the documents provided to Mr Hellen. Mr Hellen’s “reconstruction of the tenant’s rental position [was] heavily reliant on the records” that were generated by Savills MRI Management System: AB239 at [4.3.1]. The MRI Management System produced:

    “CM Receivables Ledgers” which were a report summarising all transactions applied to a tenant’s account: at [4.3.1];

    “Tax Invoice/Statement of Account”, issued on the first of the month, which set out the amounts due and payable, credits offsetting those amounts and outstanding invoices: at [4.3.2];

    “Tenant Arrears Reports”: at [4.3.4];

    “End of Month (EOM) Reports”: at [4.3.5]

205    In his report, Mr Hellen explained that he was provided with redacted bank statements for accounts operated by Savills: at [4.3.7]. These sometimes included a transaction description and sometimes included Mr Neil Shah’s “comment regarding source of funds”: at [5.1.1].

206    Mr Hellen stated that he used documents attached to his report at Appendix C to ensure Mr Shah’s “allocation appears reasonable”, but – in relation to seven transactions – he relied solely on Mr Shah’s comments: at [2.3.6], [2.3.9].

207    Mr Hellen was not provided with Savill’s EOM Reports (or Tenant Arrears Reports) for February 2017, August 2017 or October 2017: AB235 at [2.3.2]. He considered that the Tenant Arrears Reports for May 2017, July 2017 and September 2017 had been “over-redacted”: AB235 at [2.3.3]. This was plainly correct.

208    At trial, Mr Hellen was asked to explain his methodology and the “limitations” which he experienced: AB3536.4. He explained that the payments made by the tenants were reconstructed from the source documents, being bank statements, which were then “traced” to “the ledgers” of each of the nine Food Court Tenants. Mr Hellen “used what records were available to us but it was not always the case that all the records were available”. He commented that the bank statements were “heavily redacted”. Mr Gwynne agreed and considered that there were “significant limitations”: AB3538. Mr Hellen also described the fact that certain CMRs were not provided and that others were redacted as presenting a “significant difficulty”: AB3540.6 – 12. Savills had produced, under subpoena, CMRs for December 2016, January 2017, March 2017, April 2017, May 2017, June 2017, July 2017 and September 2017.

209    The redactions to the Discovered Arrears Reports (which were also provided to Mr Hellen) were apparently applied to conceal information concerning any tenant which was not a Food Court Tenant, meaning that it was not possible, for example, to see whether an amount which Mr Hellen thought should be applied to one or other Food Court Tenant had in fact been applied to a non-Food Court Tenant. As will be seen below, this is not without significance, because – for example – Mr Hellen allocated a payment of $12,000 to Bel Cibo in circumstances where another business record (an email, the reliability of which could not be open to serious doubt), indicated that the amount of $12,000 should be allocated as to $6,000 to Bel Cibo and as to $6,000 to Montezuma’s. The answer to the question whether the amount of $12,000 was properly to be allocated to Bel Cibo may have been easily resolved if records relating to tenants who were not Food Court Tenants had not been redacted.

210    In explaining the difficulties experienced, Mr Hellen stated [AB3540.12]:

The other significant difficulty was the allocation of the receipts. We just get an eighty thousand dollar amount in the bank statement and try to allocate who that should be for and to what extent.

211    The following exchange then occurred:

HIS HONOUR: This was a trust account [bank statement], though, wasn’t it?

MR HELLEN: Well, it says “trust account” on the bank statement, your Honour, but I don’t know whether it’s a true trust account or not.

HIS HONOUR: Am I correct in thinking that, ordinarily, there are much stricter requirements for trust accounting?

MR HELLEN: Yes.

HIS HONOUR: Was this complied with by Savills?

MR HELLEN: I don’t have an answer for that, your Honour. No. And I’m not an auditor either, your Honour, but it’s pretty messy.

212    Mr Hellen then explained that he was not provided with all the tax invoices for the respective tenants: AB3541.8. Mr Hellen observed that he had not been given the “end of month reports”, which he said was a reference to the “CMR reports”, for February, August or October 2017: AB3540-3541. Mr Gwynne observed that the absence of the October CMR was significant because it would show how payments were allocated and what payments were received in October 2017: AB3541. This was important because it coincided with Mr Frenil Shah seeking, successfully, to bring arrears in rent up to date.

213    As will be explained further below, the trial judge erred in the way he addressed the topic of the actual arrears of the Food Court Tenants. The principal errors were: (a) the failure to reject Mr Shah’s annotations; (b) the failure to consider any of the business records in a meaningful way on the basis that Savills’ “accounts” were “messy”; and (c) the refusal to consider or address submissions which Elanor had made in its Arrears Schedule.

214    It was not submitted that the matter should be remitted or that there should be a retrial by reason of the failure to address Elanor’s submissions or if it were otherwise considered that the trial judge’s analysis miscarried. This Court can determine the arrears position on the basis of the evidence given and the submissions which were made.

Bel Cibo

215    Mr Hellen allocated $12,000 to the Bel Cibo ledger in December 2016 based on a notation made by Mr Neil Shah, while only $6,000 had been allocated by Savills to the Bel Cibo ledger.

216    The $12,000 was received on 28 November 2016: AB3550.7.The evidence included an email dated 28 November 2016 from Ms Chaubal to Ms Coco (of Savills), copied to Mr Frenil Shah: AB594. The email stated:

Please find attached bank transfer receipts for payment of $6,000 towards [Montezuma’s – redacted in original] Rent and $6000 towards Bel Cibo Rent.

217    Mr Hellen’s evidence in cross-examination was to the effect that he applied the full $12,000 to Bel Cibo on 28 November 2016, rather than allocating $6,000 to Bel Cibo and $6,000 to Montezuma’s, because that was the only way he could get Bel Cibo’s account to balance – that is, to equal zero by 31 October 2017.

218    Mr Hellen’s evidence included (AB3553.10):

After going through a painstaking process of going through all of the other documentation – and there was no other 6000, and we needed 6000 to balance it – we used that 6000 to balance it.

219    Mr Hellen stated in cross-examination that Mr Neil Shah had annotated the bank statement for the amount to be allocated to Bel Cibo: AB3553.24. This was not one of the transactions which Mr Hellen identified in his report at [2.3.9] as being based solely on Mr Shah’s annotations, and there was no identification of any process of verification to determine that Mr Shah’s allocation was reasonable. Indeed, Mr Hellen stated in cross-examination that he had done his best to put payments where they were most likely to have occurred and that “[m]ost of the time, I’ve had evidence to do that, but there are some, like the 6000, that is unclear”: AB3555.

220    The following exchange then took place (AB3555.35 to 3556.15):

HIS HONOUR: And I think I made a note of what you said earlier – that the Savills accounts are pretty messy.

MR HELLEN: They’re very messy, your Honour. And - - -

HIS HONOUR: Mr Gwynne, did you – do you have that view of the Savills accounts?

MR GWYNNE: I – I don’t know that I have a view they’re very messy, your Honour, but they’re certainly - - -

HIS HONOUR: Messy?

MR GWYNNE: I – your Honour, what – what we don’t know is – in reality, they’ve allocated 6000 in January but not the 12,000, and what we don’t know is when that – for example, we don’t know when that other $6000 was received.

HIS HONOUR: But if the accounts were kept in accordance with Australian accounting standards, you wouldn’t have this issue about, “Well, when was the money received? When was it allocated?” It should be self-evident from the ledgers, shouldn’t it?

MR GWYNNE: Well, it should be. You would expect, your Honour, that the only thing you would get would be those differences that revolve in the next month.

HIS HONOUR: And so - - -

MR GWYNNE: And so, for example, that $6000 could have been paid in October.

221    The point Mr Gwynne was conveying, consistently with Mr Hellen’s earlier evidence, was that the CMRs were missing for certain months, and redacted for others, and – in particular – that the CMR for October 2017 had not been provided. Mr Gwynne was seeking to explain that it was unlikely that $12,000 should be allocated to Bel Cibo in December 2016 because the email of 28 November 2016 indicated that only $6,000 was for Bel Cibo’s rent and, consistently with that email, Savills’ records – kept in the ordinary course of its business operations – indicated that only $6,000 was allocated to Bel Cibo’s ledger (albeit in January 2017). Mr Gwynne was attempting to convey that it was more likely that $6,000 was paid in October 2017 when Mr Frenil Shah was seeking to bring the arrears in rent up to date.

222    The evidence did not establish that Savills “accounts” (whatever that was intended to mean) were not “kept in accordance with Australian accounting standards”. The evidence established that Mr Hellen was not provided with relevant documents such that he had to reconstruct what occurred from incomplete records, making assumptions, some of which were based on Mr Neil Shah’s unexplained annotations. One of the glaringly absent documents was the CMR and Tenant Arrears Report for October 2017 which would have showed amounts received in October 2017.

223    In his reasons, the trial judge stated:

[196]    … [T]here is a material dispute about whether an amount of $12,000 recorded as a payment in December 2016, which in fact was received on 28 November 2016. Based on a notation made by Mr Neil Shah, Mr Hellen allocated this entire amount to Bel Cibo in December 2016. In contrast an amount of $6,000 is allocated in January 2017 in the Savills records. In Mr Gwynne’s view, the difference of $6,000 related to another tenancy that is not in issue in this proceeding – Montezuma’s. When Mr Hellen was taken to these documents he accepted that $6,000 “definitely” should be allocated to Bel Cibo, but explained that “through a painstaking process of going through all of the other documentation – and there was no other $6,000, we needed $6,000 to balance it – we used that $6,000 to balance it.” A little later, Mr Hellen explained that he had worked through “all of the documentation available over a very long period of time” and in consequence did his best to allocate payments “when they were most likely to have occurred”. For most of those payments he had evidence to support his allocations, but ultimately as to this difference of $6,000 he said that the position was “unclear”. He then emphasised a point that he made earlier in his evidence that Savills records are “very messy”.

[197]    Ultimately, Elanor carries the onus of proof to demonstrate that this additional $6,000 should not be allocated to the arrears account of Bel Cibo and that in consequence, I should find that the arrears position as at July 2017 was $16,271.53 and should not be adjusted by crediting an amount of $12,000 in order to reduce it to $4,271.53, which is very close to the figure derived by Mr Hellen of $4,216.42. I am not satisfied on the evidence that the Savills records are sufficiently accurate to establish the fact of arrears for Bel Cibo in the amount contended by Elanor. What is clear from Mr Hellen and Mr Gwynne’s analysis is that amounts were received, but not allocated in MRI correctly in the month of receipt. Mr Hellen undertook an extensive reconciliation of the Savills records by reference to primary source documents, such as the bank statements and tax invoices, and I prefer his comprehensive analysis to the more limited task that Mr Gwynne performed without interrogating the correctness of the Savills records. The arrears position as at July 2017 was $4,216.42.

224    Mr Neil Shah’s annotations were inadmissible and ought to have been rejected. The email of 28 November 2016 was admitted as a business record. It was relied upon in the Arrears Schedule. The trial judge at [197] concluded that Mr Hellen had given evidence that the “Savills records” were “very messy” and proceeded, as a matter of substance, on the basis that it was unnecessary to have regard to the Arrears Schedule or the documents referred to in that submissions: J[217]. Mr Hellen’s unexplained opinion, first made in the context of a question concerning a bank statement, was not a proper basis for refusing to consider, or rejecting the reliability of, a contemporaneous email explaining the purpose of a business transaction. The email of 28 November 2016 was inherently likely to be correct in its explanation that $6,000 was for Bel Cibo and $6,000 was for Montezuma’s.

225    The trial judge’s conclusion that the whole $12,000 was properly allocated to Bel Cibo’s “ledger” was affected by error, as was his approach to the evidence and submissions more generally. A payment of $6,000 was correctly recorded as rent paid by Bel Cibo in Savills’ records. The payment should have been recorded when received on 28 November 2016, rather than being first recorded in January 2017.

226    It should also be noted that, whilst the trial judge was correct to state at J[197] that Elanor bore the onus of proving its case, the evidence ought to have been assessed in accordance with the relative capacities of the parties to bring evidence on the topic: Blatch v Archer (1774) 1 Cowp 63. The documents provided to Mr Hellen were those in the control of the respondents (and their agents) and the redactions were presumably applied by them or their advisors. The documents provided were incomplete in material ways, in particular by reason of the absence of some of the EOM Reports (and monthly Tenant Arrears Reports and “CMR reports”) and, in particular, documents explaining what transactions occurred in October 2017 when Mr Frenil Shah was seeking to bring the various tenants’ arrears into order.

227    The trial judge’s lack of satisfaction “on the evidence that the Savills records are sufficiently accurate to establish the fact of arrears for Bel Cibo in the amount contended by Elanor” was affected by error.

228    The fact that some entries in Savills’ records were incorrect (in particular late entries), or even that its “accounts” were “messy”, was not a proper basis for the wholesale rejection of each and every transaction recorded in all of them, without consideration of the reliability of the particular aspect of them relevant to the factual issue in dispute, particularly when it was not disputed that most of the transactions within them were correctly recorded.

229    Leaving aside the fact that $6,000 should have been allocated to Bel Cibo in December 2016 rather than January 2017, the only material issue in dispute was whether an additional $6,000 should have been allocated to Bel Cibo in December 2016. That is, the Tenant Arrears Report for December 2016 was agreed to be relevantly correct except for this amount. There was a persuasive contemporaneous business record which showed that the relevant $6,000 was to be allocated to a tenant other than Bel Cibo. Mr Hellen’s allocation of the amount of $6,000 to Bel Cibo to make the ledger balance was arbitrary. It was directly contrary to persuasive contemporaneous evidence and unsupported by anything apart from Mr Neil Shah’s annotation.

230    Further, whilst the trial judge referred at J[197] to Mr Hellen’s “extensive reconciliation of the Savills records by reference to primary source documents, such as the bank statements and tax invoices” and his “comprehensive analysis”, the trial judge did not address the fact that Mr Hellen’s analysis was in fact performed on the basis of materially incomplete records in a process which assumed nil arrears balances as at 31 October 2017 (except for Burrito Bar) without knowing many of the transactions which took place in October 2017.

231    Mr Hellen allocated a payment of $726 to Bel Cibo’s ledger in January 2017. There was no evidence of this payment being made at any time. The only evidence that the payment was made was the fact that Bel Cibo’s arrears balance was zero by 31 October 2017. No reasons were given for accepting Mr Hellen’s allocation of the amount to January 2017. One might have thought, given the absence of the EOM Report or Tenant Arrears Report for October 2017 and the absence of a reference to the amount in any of the other Tenant Arrears Reports, that the amount was received in October 2017. Mr Hellen included the amount of $726 to ensure the “ledger” balanced, ignoring that the payment could have been made in October 2017. The trial judge did not address Elanor’s submissions in this regard: J[217]. This Court is in as good a position as the trial judge to consider it. In light of Mr Frenil Shah’s evidence, and the absence of any record of a payment of $726 in the incomplete material made available to Mr Hellen or any other business record in evidence, it is more likely that arrears were paid in October 2017 than that an amount of $726 was paid in January 2017.

232    Mr Hellen allocated an amount of $1,500 to Bel Cibo in May 2017. The issue arose in the following way. A bank statement showed that an amount of $9,392.23 was paid to Savills on 30 May 2017: AB479. There was no annotation by Mr Neil Shah allocating this amount as between tenants. The monthly Tenant Arrears Report for May 2017 recorded that a “Last Payment” of $7,892.23 had been made by Bel Cibo on 30 May 2017. The monthly Tenant Arrears Report for June 2017 allocated the amount of $7,892.23 to Bel Cibo on 30 May 2017: AB427; AB611. The experts agreed that $7,892.23 was paid on 30 May 2017.

233    Mr Hellen’s allocation of the additional amount of $1,500 to Bel Cibo is: (a) based on an assumption that the amount was paid by Bel Cibo; (b) not based on any annotation made by Mr Shah; and (c) is inconsistent with Savills’ records, except to the extent that they show a nil balance as at the end of October 2017. The trial judge did not address the issue: J[217].

234    It is more likely that Bel Cibo’s arrears were brought up to date in October 2017 than that the amount of $1,500 was paid in May 2017 in light of: (a) the Savills records recording the payment of $7,892.23 on 30 May 2017; (b) the lack of any record of a payment of $1,500 being made by Bel Cibo before 31 October 2017; (c) the absence of documents recording the transactions in October 2017; and (d) Mr Frenil Shah’s evidence that he pursued arrears in October 2017.

235    The consequence is that Bel Cibo was in arrears in December 2016 in the amount of $15,213.19. It was also in arrears in February 2017 ($9,991.23), March 2017 ($8,969.49), June 2017 ($10,271.11) and July 2017 ($10,990.42).

236    Bel Cibo remained in arrears in August 2017. Given his position and role at the time, including his role in providing information relevant to the Centre to prospective purchasers, it is likely that Mr Frenil Shah knew Bel Cibo was in arrears as at 30 August 2017 when he met with Mr Hamilton. The same applies with respect to other tenants with arrears at that time.

Dizzy Dukes

237    In addressing the evidence given by Mr Frenil Shah, the trial judge stated at J[147]:

[147]    Mr [Frenil] Shah also gave unimpressive and incredulous evidence about an amount of $13,750 [paid on 8 February 2017 and] credited to the account of Dizzy Dukes on 20 April 2017, described as an unapplied receipt on the Tenant Arrears Report for May 2017. Mathematically, by reference to other business records, this sum represented a part payment of the security deposit of $41,250. The balance of $27,500 was paid on 20 April 2017. Despite being faced with this compelling evidence, Mr Shah insisted that the tenant had simply paid rent in advance – a proposition that sits uncomfortably with the fact that the incentive deed deferred the rent commencement date to 15 May 2017 and there were further deferrals, caused by the upgrading work, to 1 June 2017. Mr Shah’s evidence that $13,750 was a pre-payment of rent cannot be accepted in the light of the contemporaneous business records.

238    The experts agreed that the amount of $13,750 was applied to Dizzy Duke’s rent: AB481. It was allocated to rent by Savills on 20 April 2017: AB605; AB640. Mr Hellen considered that it should have been applied to rent when it was paid, namely on 8 February 2017. The experts disagreed about whether the amount of $27,500 paid on 20 April 2017 was a pre-payment of rent or part payment of the security deposit.

239    The trial judge, inconsistently with his conclusion based on the contemporaneous business records at J[147], accepted the evidence of Mr Hellen that the amount of $27,500 was a pre-payment of rent. His Honour stated:

[201]    Mr Hellen next drew attention to a contemporaneous email sent by Mr Neil Shah to Ms Coco on 26 September 2017 which recorded, amongst other things, an amount of $11,250 received from Dizzy Dukes, in which Mr Shah directed to be transferred to the security deposit account. Mr McQuade drew Mr Gwynne’s attention to an email sent by a Mr Chaubal of Dizzy Dukes to Ms Coco on 18 September 2017, which attached a bank receipt for payment of $15,000 for the bank guarantee. He then identified other payments recorded in email correspondence on 22 and 25 September 2017 in the further sums of $15,000 and $11,250, in order to make up the total payment of $41,250 to the bank guarantee. Mr Gwynne accepted that these amounts should be allocated to the security deposit, which leaves for allocation the earlier amounts identified by Mr Hellen of $27,500 and $2,664.45 paid on 20 April 2017. I find in accordance with the evidence of Mr Hellen that these amounts should have been allocated to rent.

240    The Dizzy Dukes “Commencement Date”, according to the lease, was 1 April 2017: AB682. The lease was signed by Dizzy Dukes on 9 March 2017. The Dizzy Dukes tenancy did not in fact commence until 1 June 2017: J[147]. The material before the Court on this appeal does not establish that there was any requirement to pay rent before that date. The “Security Amount” was stated to be: “As at the Commencement Date, the bank guarantee amount is $41,250.00” (broadly, 3 months’ rent). Clause 9 of the lease provided that the tenant must give the bank guarantee at least seven days before the Commencement Date: AB704. The trial judge referred to the “Security Amount” or bank guarantee as the “security deposit”. It was uncontroversial that the Food Court Tenants could give a security deposit rather than a bank guarantee.

241    According to the terms of the lease, if the tenant did not comply with any of its obligations under the lease, the landlord may draw on the security deposit without notice: AB704. If the landlord drew on the security deposit, the tenant had to give the landlord a replacement deposit or bank guarantee within 14 days of demand: AB704.

242    In addition to the payments made on 8 February 2017 and 20 April 2017 totalling $41,250, Dizzy Dukes made three payments in September 2017, totalling $41,250: two payments of $15,000 and a payment totalling $11,250 (a payment of $5,000 and a payment of $6,250): AB1895-1897. The emails confirming these September 2017 payments expressly stated that they were made in respect of Dizzy Duke’s bank guarantee.

243    The trial judge considered that the business records put to Mr Frenil Shah, described at J[147] as comprising “compelling evidence”, showed that the two amounts paid on 8 February 2017 and 20 April 2017 totalling $41,250 were for the security deposit. Inconsistently with this conclusion, his Honour accepted the evidence of Mr Hellen that both amounts were pre-payments of rent: J[201]. His Honour stated at J[201] that “Mr Gwynne accepted that [the] amounts [paid in September 2017] should be allocated to the security deposit”. That is correct, but Mr Gwynne did not accept that the amount of $27,500 paid on 20 April 2017 was paid as a pre-payment of rent: AB3570. Mr Gwynne’s evidence, although not entirely clear, was that the amount was for the security deposit but that something changed by or in September. His Honour did not address this evidence or the submission made by Elanor in its Arrears Schedule that the amount of $27,500, when paid on 20 April 2017, was paid in respect of the security deposit: J[217].

244    There are a number of possibilities as to what the payments on 8 February 2017 and 20 April 2017 totalling $41,250 could have been for: (a) pre-payments of rent; (b) payment of the “security deposit” of $41,250; (c) partly pre-payment of rent and partly pre-payment of the “security deposit”.

245    It is likely that the amount of $13,750 paid on 8 February 2017 was paid as a rental deposit to secure the lease, consistently with the evidence of Mr Frenil Shah (AB3427) and the treatment of that amount in Savills records (on 20 April 2017).

246    It is more likely that the amount of $27,500 paid on 20 April 2017 was, when made, paid on account of the security deposit rather than for rent given the circumstances that:

    there was no apparent obligation to pre-pay rent;

    there was an obligation to pay a security deposit before the “Commencement Date”;

    the payment of $27,500 was not allocated to rent in Savills records; and

    it would be uncommercial to pay rent in advance where there was no obligation to do so and an outstanding obligation to pay a security deposit.

247    The probabilities favour that the amount of $13,750 paid on 8 February 2017 was applied to rent and outgoings and that the amount of $27,500 paid on 20 April 2017 was ultimately applied to rent and outgoings. The amount of $27,500 paid on 20 April 2017 was probably not allocated, when it was received, as a pre-payment of rent in Savills records because, at that time, it was paid and held in respect of the security deposit. The later application of the amount of $27,500 to rent would explain why the full security deposit was required to be paid in September 2017.

248    The Tenant Arrears Report for July (printed on 15 August 2017) indicates that Dizzy Dukes was in arrears in the amount of $2,899.17: AB619. The Tenant Arrears Report for September (printed on 5 October 2017) indicates that Dizzy Dukes was in arrears in the amount of $2,899.17 (for July 2017); $11,535.05 (for August 2017) and $14,172.70 (for September 2017), totalling $28,606.92: AB623. Mr Hellen’s report concludes that Dizzy Dukes was in advance for each month from June 2017 (the lease commenced on 1 June 2017) to September 2017 and that there was a zero balance as at 31 October 2017. This results from the recording of the amount of $27,500 as a pre-payment of rent made in April 2017 and from the inclusion of an amount of $2,664.45 in April 2017 and from the inclusion of amounts of $2,513.82, $11,327.76 and $2,600 in September 2017. The amounts of $2,664.45 (April 2017) and $2,513.82, $11,327.76 and $2,600 (September 2017) were each based on Mr Neil Shah’s annotations to bank statements. None of them were referred to in the Tenant Arrears Report for September 2017. Given that Mr Neil Shah’s annotations ought to have been rejected, there was no evidentiary basis for allocating these amounts to Dizzy Dukes rent inconsistently with Savills’ business records.

249    The better conclusion on the evidence adduced is that Dizzy Dukes was in arrears as at July 2017 in an amount of $2,899.17. It was in arrears as at 30 August 2017 in an amount of $14,434.22 and in September 2017 in an amount of $28,606.92.

Sushi Kuni

250    The trial judge accepted that Sushi Kuni had arrears in April, May, June, July and August 2017, but that it made regular payments over that period such that the arrears total did not materially increase within that period: according to the second scenario of Mr Hellen the amount fluctuated between $15,708.59 and $11,139.78 and according to the Savills records the amounts were between $15,708.69 and $19,942.61: J[210]. Inferentially, the trial judge accepted the “second scenario of Mr Hellen”. It was not disputed on appeal that the trial judge was correct to do so.

251    Although the trial judge did not address the matter, or make an explicit finding, it follows from his Honour’s reasoning that Sushi Kuni was also in arrears in December 2016, January 2017 and February 2017.

Burrito Bar

252    Burrito Bar was always in arrears, even at 31 October 2017. The issue between the experts concerned an amount of $14,782.10. The trial judge stated:

[198]    For Burrito Bar, the joint reconciliation of the experts reveals that as at July 2017 this tenant was in credit in the amount of $14,782.10, which deteriorated to an arrears of $11,022.85 by October 2017. According to the Savills records there was a zero balance in July 2017, and then an arrears of $11,022.85 in October 2017. The July balance difference is explained by a non-cash credit that was ultimately applied against the rent to September 2017, but which was not posted until October 2017. Mr Hellen maintained his view that credits raised in October 2017 should be taken into account in the period to which they relate, in this case September 2017. On closer analysis, Mr Hellen explained that some of those credits appeared to relate to March to May 2017, although in the documents available to him he was not able to “work it out” with precision. Once again, to the extent that there remains a difference between Mr Hellen and Mr Gwynn’s analysis, I prefer Mr Hellen’s evidence and I find accordingly because of the thoroughness of the reconciliation that he undertook and the fact that he did not work from the assumption that the MRI records were correct. As at July 2017 Burrito Bar was in credit in an amount of $14,471.59.

253    In its Arrears Schedule, Elanor had referred to various business records. An email from Mr Neil Shah to Ms Coco sent on 10 October 2017 requested her to “please raise credits for all Sep 17 charges for a total of $14,782.10”: AB2186. The email of 10 October 2017 clearly indicated that the credit was to be applied to the list of charges raised on 1 September 2017 for base rent and other matters. The trial judge did not have regard to Elanor’s submissions: J[217].

254    In the joint report, Mr Hellen stated [AB480]:

Mr Hellen is of the opinion that credits raised by Savills in October 2017 should be taken into account in the period that the credits relate to, namely September in relation to Scenario A and March to May 2017 for Scenario B. It is possible that the credits relate to March to May and September as the exact details cannot be ascertained…

255    The difficulty with Mr Hellen’s Scenario B is that the only business records in evidence indicated that the credit was agreed on 10 October 2017 and it was agreed to be applied to the identified charges on 1 September 2017. Mr Hellen’s evidence in the joint report that “it [was] possible that the credits relate to March to May and September as the exact details cannot be ascertained” was not sufficiently explained in his oral evidence: AB3563. Mr Gwynne correctly stated that there was a “trail of documents [which] suggests it’s a credit for September”, those documents having been referred to in the joint report: AB3563; AB480. The trial judge did not have regard to the Arrears Schedule which referred to the business records to which Mr Gwynne referred, including the email of 10 October 2017: J[217]. There was no sound evidentiary basis to conclude that there was an agreement, contradicting the terms of the email of 10 October 2017, that the credits related to earlier charges.

256    The better view on the evidence was that Burrito Bar was in arrears in May 2017 ($5,278.50), June 2017 ($40.51) and August 2017 ($11,229.81).

Mumbai Blues

257    The issue dividing the parties on appeal concerned an amount of $5,683.33. At trial, the experts agreed that the amount was to be allocated to Mumbai Blues, but differed as to when it should be allocated. Mr Hellen allocated the amount to Mumbai Blues’ ledger for March 2017, with the result that it was ahead in its rent payments, noting its lease commenced on 1 May 2017. Mr Gwynne considered it should be allocated in August 2017.

258    The trial judge did not address this issue, instead addressing an issue concerning an amount of $8,864.01. This amount was not contentious on the appeal. His Honour stated:

[207]    Mumbai Blues is next. Mr Hellen’s reconciled balance for July 2017 is an amount of $3,164.63 in arrears, which by October 2017 improved to a credit amount of $8,864.01. In contrast, the Savills records disclose arrears for July 2017 of $8,847.96 and a nil balance in October 2017. In explanation of the differences, Mr Hellen said that he could not be “absolutely certain” but, by the time he had undertaken a complete reconciliation for this tenant, he had $8,864.01 leftover, which he then applied to the October 2017 balance. Mr Gwynne pointed out that this amount was allocated in accordance with a narration on a bank statement from Mr Neil Shah, and the amount does not appear at all in the Savills records. On that basis, Mr Gwynne questioned the assumption made by Mr Hellen. In response Mr Hellen said that it was “very curious” that the amount annotated by Mr Shah was exactly the same amount as the excess sum that he calculated. In resolving this item, I am not satisfied that Elanor has discharged its onus of proving the accuracy of the Savills records. I accept the evidence of Mr Hellen, that having undertaken a complete reconciliation, there is an amount outstanding which he applied to rent. The point is that the Savills records do not explain the difference.

259    The respondents submitted that Elanor’s argument on appeal concerning the amount of $5,683.33 was different to what it had submitted at trial. However, contrary to this submission, the argument was raised in the Arrears Schedule. As noted earlier, the Arrears Schedule was not considered by the trial judge: J[217]. On this occasion that does not matter because Elanor’s contention should be rejected.

260    The relevant record of payment, a document called “Payee Transfer details”, does not establish that the amount was paid with respect to Mumbai Blues: AB681. The amount was paid from the “Bluewater Trust” (an account held by Alceon) to Savills. Savills bank account statement records the payment on 10 March 2017 as being “Deposit – Bluewater rent chqBluewater Trust”: Annexure B to the Respondents’ Joint Submissions on Arrears Schedule. Mr Hellen appeared to be unfamiliar with the accounts referred to on the “Payee Transfer details”: AB3574.14 to 3575.15. However, an email from Mr Neil Shah sent on 15 August 2017 to Ms Chan and Ms Coco requests that the amount be allocated to “Mumbai Blue’s arrears at Bluewater as their 1st month rent”: AB1474. There is no apparent reason to doubt the accuracy of this business record. The amount should be allocated to Mumbai Blues’ ledger when it was received, not when it was allocated. It follows that Mr Hellen’s treatment of this amount was correct.

261    The better view on the evidence adduced is that Mumbai Blues had arrears in June 2017 ($238.63), July 2017 ($3,164.63) and September 2017 ($1,895.63): AB485.

Redcliffe Noodle Kitchen

262    The trial judge addressed Redcliffe Noodle Kitchen in the following way:

[208]    Redcliffe Noodle Kitchen is marked as “not known” on the Savills records for the period December 2016 until July 2017. And then in August 2017, the rent account is shown in arrears in the amount of $6,302.87, reducing to an arrears of $5,606.34 in September 2017. In contrast, Mr Hellen calculates that the tenant was in credit in the amount of $16,654.01 in May 2017, and remained in credit, with the balance reducing each month, until October 2017 when the credit was $10,293.43. Mr Hellen explained that the final credit was allocated by him to rental, because it was money that was left over in consequence of his reconciliation, although he did rely on the identification by Mr Neil Shah of two payments of $16,654.01 and $14,063.91 as relating to this tenant. Mr Gwynne points out that he was not able to identify any documentation which supports these allocations. My finding is that despite the fact that Mr Hellen placed some reliance upon the identification of two amounts by Mr Neil Shah, the basis of which was not established in evidence given by him, I am not satisfied that Elanor has established the arrears balances as recorded in the Savills records for August and September 2017 because of my overall finding that these records are not reliable. In any event, the joint position of the experts is that there were no arrears in July 2017, and none before that month.

263    In its Arrears Schedule, Elanor submitted that an email from CPRAM (Mr Neil Shah) on 18 August 2017 to Mr Song and Ms Coco established that Redcliffe Noodle Kitchen was in fact in arrears. The email set out calculations (arrears of $1,076 as at June 2017, $5,546 as at July 2017, and $5,323 as at August 2017) and stated that the tenant “needs to urgently pay $11,944 to clear all the arrears from 25th June to 31st August 2017”: AB1483.

264    Mr Hellen considered that Redcliffe Noodle Kitchen was in advance of its rental obligations on the basis of payments of $16,654.01 on 2 May 2017 and $14,063.91 on 27 September 2017. Mr Hellen relied only on the advice of Mr Neil Shah to justify those payments: AB 237 at [2.3.9]; AB486 at Notes MJG 1 and MJG 2.

265    The respondents submitted that the experts accepted that there were no arrears in June or July 2017. That proposition cannot be accepted so far as concerns Mr Gwynne. Mr Gwynne’s position as expressed in the relevant schedule to the joint report was that the position as at June 2017 and July 2017 was not known, in that there were no monthly reports for Redcliffe Noodle Kitchen. However, he did not accept the amounts of $16,654.01 on 2 May 2017 and $14,063.91 on 27 September 2017 relied upon by Mr Hellen.

266    At trial, Mr Frenil Shah gave evidence that invoices for June and July 2017 had not been issued to Redcliffe Noodle Kitchen: AB3465. Referring to this evidence in closing submissions at trial, senior counsel for Elanor submitted:

The other tenancy, your Honour, that we say arrears is applicable to is the Redcliffe Noodle Kitchen … Now, I think there was some evidence that they hadn’t yet been put on the system for Savills and, therefore, invoices hadn’t yet been issued. But with respect, that doesn’t change the circumstances that they were in arrears.

267    On this appeal, the respondents submitted that the email of 18 August 2017, or the propositions said to flow from it, should have been put to the experts. That submission was not advanced at trial. Indeed, at trial, senior counsel for CPRAM, addressed the case advanced by Elanor, submitting that “[e]ven though there was an allocated payment, you may recall that Redcliffe Noodle wasn’t invoiced until August … [s]o according to the arrears reports, it wasn’t in arrears”: AB3839.47 – AB3840.6.

268    The notations of Mr Neil Shah ought to have been rejected. There was insufficient basis for Mr Hellen’s conclusion that Redcliffe Noodle Kitchen was in advance of rent for the whole period May 2017 to 31 October 2017: AB486. Savills’ records for August and September 2017 were inconsistent with Mr Hellen’s assumption (based on Mr Neil Shah’s unexplained notations) as was the email of 18 August 2017.

269    It is likely that Mr Frenil Shah was aware, as at 30 August 2017, that Redcliffe Noodle Kitchen had commenced its lease on 25 June 2017 and that it had incurred obligations to pay rent in respect of June and July 2017 and, on 1 August 2017, in respect of the month of August 2017 which had either not been invoiced as at 30 August 2017 or had only then recently been invoiced. Further, the preferable view is that Redcliffe Noodle Kitchen was in arrears as at 31 August 2017 in the amount of $6,302.87 (AB486) and in the amount of $5,606.34 in September 2017, consistently with Savills’ records.

Summary of arrears

270    The trial judge’s conclusion was that, of the nine Food Court Tenants, only 3 were in arrears as at 31 July 2017: Bel Cibo with arrears of $4,216.42, Mumbai Blues with arrears of $3,164.63 and Sushi Kuni “which on one scenario was in credit but on the alternative was in arrears in the amount of $11,802.83”: J[218]. This conclusion was affected by a number of errors, as demonstrated above.

271    The trial judge did not appear to consider the history of arrears before or after 31 July 2017 to be significant. The arrears at times other than 31 July 2017 are relevant. First, Mr McNaughton reviewed each of the Data Room Arrears Reports and saw nothing that concerned him. Secondly, if Mr Frenil Shah had answered the questions asked of him at the meeting on 30 August 2017, the history of arrears is likely to have become apparent because it is likely that Mr Hamilton and Mr McNaughton would have sought more information and it is likely that they would have obtained more accurate Tenant Arrears Reports such as the much lengthier ones comprising the Discovered Arrears Reports which recorded that many of the Food Court Tenants had arrears at relevant times. It is likely that, in these circumstances, the tenancy arrears position would have been monitored by Elanor after 30 August 2017.

272    On the evidence adduced at trial, the tenancy arrears position was as follows:

(a)    As at 31 December 2016:

(i)    Bel Cibo: $15,213.19

(ii)    Sushi Kuni: $8,742.56

(b)    As at 31 January 2017:

(i)    Sushi Kuni: $2,788.90

(c)    As at 28 February 2017:

(i)    Bel Cibo: $9,991.23

(ii)    Sushi Kuni: $15,180.71

(d)    As at 31 March 2017:

(i)    Bel Cibo: $8,969.49

(e)    As at 30 April 2017:

(i)    Sushi Kuni: $15,708.59

(f)    As at 31 May 2017:

(i)    Sushi Kuni: $9,928.90

(ii)    Burrito Bar: $5,278.50

(g)    As at 30 June 2017:

(i)    Bel Cibo: $10,271.11

(ii)    Sushi Kuni: $9,285.89

(iii)    Burrito Bar: $40.51

(iv)    Mumbai Blues: $238.63

(v)    Redcliffe Noodle Kitchen: $1,076

(h)    As at 31 July 2017:

(i)    Bel Cibo: $10,990.42

(ii)    Dizzy Dukes: $2,899.17

(iii)    Sushi Kuni: $11,802.83

(iv)    Mumbai Blues: $3,164.63

(v)    Redcliffe Noodle Kitchen: $5,546

(i)    As at 30 August 2017:

(i)    Bel Cibo: $10,142.58

(ii)    Dizzy Dukes: $14,434.22

(iii)    Sushi Kuni: $11,139.78

(iv)    Burrito Bar: $11,229.81

(v)    Redcliffe Noodle Kitchen: $6,302.87

(f)    As at 30 September 2017:

(i)    Bel Cibo: $10,252.95

(ii)    Dizzy Dukes: $28,606.92

(iii)    Burrito Bar: $11,229.81

(iv)    Redcliffe Noodle Kitchen: $5,606.34

(v)    Mumbai Blue: $1,895.63

Conclusion on misleading conduct

273    The fourth step is to determine whether the relevant conduct, in light of the meaning conveyed by the conduct, was “misleading or deceptive or ... likely to mislead or deceive”: Self Care at [80].

274    As at 31 July 2017, some of the Food Court Tenants either were in, or had a history of, arrears. It follows that the conduct was misleading or deceptive because it conveyed that none of the Food Court Tenants were in, or had a history of, arrears as at 31 July 2017.

275    The case was also conducted on the basis that Alceon conveyed that none of the Food Court Tenants were in, or had a history of, arrears as at the time of the meeting on 30 August 2017. The respondents’ conduct also conveyed this meaning. This was also misleading.

RELIANCE

Introduction

276    As noted earlier, the trial judge addressed the question of reliance at J[247] – [272]. His Honour had also addressed issues relevant to reliance at J[220] – [238] as part of the “context” for assessing whether the conduct was misleading or deceptive.

277    It is convenient to refer to “reliance” given the terms of the trial judge’s reasons, however the question is whether the respondents suffered damage “because of” the impugned conduct, as the trial judge made clear at J[252] and see: Campbell at [143].

278    The trial judge was “not satisfied that Elanor has discharged its onus that it relied upon the representations or the conduct that it asserts”: J[272]. This conclusion was based on two overarching conclusions (each of which arise from or involve other findings):

(a)    first, “the arrears position of individual Food Court Tenants was not a consideration which Elanor took into account”: J[264];

(b)    secondly, “that the redevelopment potential of the site was a primary motivating factor to acquire the Centre”: J[271].

279    Before turning to the two overarching findings, something should be said about the trial judge’s approach to the assessment of the reliability of Mr McNaughton’s evidence generally.

The assessment of the reliability of Mr McNaughton’s evidence

280    The trial judge noted that the only subjective evidence on reliance was given by Mr McNaughton: J[249]. The evidence of Mr McNaughton in this respect concerned how he would have recalculated what price to recommend to Elanor’s board for Elanor to purchase the Centre if he (Mr McNaughton) had come to find out, after the second expression of interest on 18 August 2017 (for a purchase at $55.25 million) that the Food Court Tenants had a history of arrears and were “at risk”.

281    The trial judge summarised Mr McNaughton’s evidence at J[249] in the following way:

(a)    If Mr McNaughton had known that “one or more” of the Food Court Tenants were at risk during the due diligence period, then he would have performed a recalculation of the purchase price by removing those tenants from the net passing income, adjusting the capitalisation figure to reflect a higher degree of risk and by adding back some of the expected rental, on the assumption that three tenancies would likely be relet within 12 months.

(b)    Mr McNaughton would have discussed the recalculated position with Mr Baliva and would not have progressed the recommendation to Elanor’s board that the Centre be acquired at the price of $55.25 million stated in the second expression of interest.

(c)    The recalculated purchase price would have resulted in a lower expression of interest. In the event that the new offer was rejected, he would not have progressed a report to the board to acquire the Centre at the price stated in the second expression of interest.

(d)    In those circumstances, and in his experience, the board would not have proceeded to consider the purchase of the Centre and the transaction would have concluded at that point.

282    As to (a), Mr McNaughton’s evidence that he would add back three tenancies was based on the assumption that he had notionally removed from his calculations all nine of the Food Court Tenants by reason of them being “at risk” tenants. Mr McNaughton did not state that he would add back three no matter how many “at risk” tenants were removed. His Honour’s reference to “one or more” must be understood as a reference to all nine. It would make no sense to exclude one “at risk” tenant and then add back three. The reason for notionally adding back three tenants was explained by Mr McNaughton and included that, with a high level of vacancies, he would consider at most only three would be leased out again within a year and that he would consider the remaining six to be permanent vacancies: McNaughton 1 at [238(d)]. His reasons for that position were explained and included that: “Where a number of tenancies are geographically grouped together, a longer-term vacancy is expected whilst potential structural work is undertaken”. The nature of the structural work, and the reasons for it, were also explained.

283    After summarising at J[249] the aspects of Mr McNaughton’s evidence as to how he would have calculated what offer to make for the purchase of the Centre if he had known that the Food Court Tenants had a history of arrears and were “at risk”, the trial judge summarised the relevant legal principles employed to examine whether a person did something because of misleading conduct. At the beginning this summary, his Honour stated at J[250]:

I exercise caution in relation to this evidence of Mr McNaughton for the well-known reason that retrospective hypothetical evidence of that character is unreliable because it is self-serving.

284    For the proposition that it is “well-known … that retrospective hypothetical evidence of that character is unreliable because it is self-serving”, his Honour cited Barnes v Forty Two International Pty Ltd [2014] FCAFC 152; 316 ALR 408 at [184] (Beach J, with whom Siopis and Flick JJ agreed) and Addenbrooke Pty Ltd v Duncan (No 2) [2017] FCAFC 76; 348 ALR 1 at [500]-[502] (Gilmour and White JJ).

285    The passage in Barnes at [184] is:

Further, direct evidence of reliance was not necessary. As was said by this Court in Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 at 483 per Beaumont, Foster and Hill JJ, absence of direct evidence of reliance is not fatal. Absence of such direct evidence does not necessarily preclude a finding of reliance. Moreover, any question of what they would have done if the information had been disclosed would necessarily be hypothetical. As was said by this Court, “[a]s such, the answer, in itself, might well be regarded as carrying little weight and being essentially self-serving”. The appellants referred to some observations in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [55] per French CJ and at [147] per Gummow, Hayne, Heydon and Kiefel JJ to suggest that his Honour could not “put forward his own assessment of what may have happened in the absence of any director saying what they in fact would have done”. These passages do not stand for that proposition in such generality. First, in that case, only the evidence and state of mind of one person, Mr Weeks was being considered. That is not this case. Second, all that the Court said at [147] was that “…it was not open to the Court of Appeal to infer, from its own assessment of the materiality of the representation and its own assessment of whether the representation was calculated to induce entry into a contract, that Mr Weeks would not have proceeded with the share purchase”. But in the present case, his Honour was not proceeding on the basis of such a limited foundation.

286    The reference to “direct evidence” in Barnes in this context is a reference to evidence from the person who would have behaved differently if the conduct had not occurred.

287    The first matter to note about the reasoning in Barnes at [184] is that it addressed a ground of appeal to the effect that the trial judge erred in concluding that there was reliance when none of the respondents’ witnesses gave evidence that they had been misled or that they relied on the relevant conduct: at [180]. The Full Court stated that the “[a]bsence of such direct evidence does not necessarily preclude a finding of reliance”: at [184] (emphasis added). It was in that context that the Full Court observed that, in any event, it might be the case that such evidence would carry little weight or be “essentially self-serving”: at [184]. That is, the principal point being made was that an applicant does not fail to discharge the onus of establishing reliance merely because the applicant fails to adduce direct evidence of reliance.

288    The parts of Campbell referred to in Barnes at [184], show that there are circumstances where direct evidence is important, particularly if it is the state of mind of one person which is of significance. In the present case, Mr McNaughton’s state of mind was of central importance.

289    The context of the passages referred to by the trial judge at J[250] in the reasons of the Full Court in Addenbrooke at [500]-[502] is similar to the context in Barnes. The complaint made by the appellant in Addenbrooke was that one Mr O’Neil had not given evidence “that knowledge of the more extensive matters said not to have been disclosed would have made any difference to his decision”: at [495]. Like the Full Court in Barnes, the Full Court in Addenbrooke at [500] referred to the observations of the Full Court in Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd [1992] FCA 550; 38 FCR 471 at 483:

Although direct evidence of reliance might have been obtained by the appropriate questioning of [the witness], we do not regard the absence of this evidence as fatal in the sense that it necessarily precludes the finding of reliance. Indeed, as the information as to the prior problems with the supplier had been held from [the witness], any question as to what he would have done had it been disclosed to him, would necessarily be hypothetical. As such, the answer, in itself, might well be regarded as carrying little weight and being essentially self-serving.

290    The proposition that Mr McNaughton’s evidence about what he would have done in terms of his calculations, had he come to learn that the income stream he had considered achievable was in fact less than he had thought, was “unreliable because it is self-serving”, and that it should be treated with “caution” because it is hypothetical, overstates the effect of the authorities.

291    The true position is that, in giving weight to direct evidence about reliance, account should be taken of all of the circumstances, including the obvious circumstance that the evidence is necessarily hypothetical. Further, where appropriate, account should be taken of the fact that evidence about reliance might be difficult to test. In this case, however, the evidence of Mr McNaughton summarised at J[249] to which the trial judge was referring at J[250] was not of a nature that it could not be tested. It was easily capable of being tested by reference to the objective circumstances and its objective rationality. Another circumstance which might be taken into account is that a witness might consciously or subconsciously seek to advance their own case. That consideration is not difficult to take into account in assessing direct evidence against the objective circumstances. One should not start from the assumption that all evidence about reliance is unreliable because it is hypothetical and self-serving.

292    As discussed further below, Mr McNaughton’s evidence concerning how he would have gone about recalculating the offer price if he had known tenants had been in arrears was consistent with what one would conclude from a consideration of the objective circumstances. Further, in circumstances where there was no dispute about the way Mr McNaughton calculated the offer price, his evidence provided important and valuable support for what would otherwise have required the Court to reach conclusions solely on the basis of inference from the established facts. No doubt if he had not given evidence on the topic, the respondents would have asked the Court to draw an adverse inference having regard to what was said by Handley JA in Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418F-G and, in particular, 419E-F. In those two passages, his Honour stated:

There appears to be no Australian authority which extends the principles of Jones v Dunkel to a case where a party fails to ask questions of a witness in chief. However I can see no reason why those principles should not apply when a party by failing to examine a witness in chief on some topic, indicates “as the most natural inference that the party fears to do so”. This fear is then “some evidence” that such examination in chief “would have exposed facts unfavourable to the party”: see Jones v Dunkel (at 320-321) per Windeyer J …

In my opinion the trial judge fell into error in drawing the inference that the endorsement would not have been acceptable to the insured. Counsel for the insured did not ask Mr Ferrarese about this matter either in chief or in reply and did not cross-examine Mr Green on the matter either. Moreover the insured did not call any representative of the broker to establish what view the broker would have taken and what advice it would have given Mr Ferrarese. In these circumstances I do not consider that inferences should be drawn favourable to a party whose counsel refrained from asking any question on this topic. Again it appears to me that the principles earlier referred to derived from Jones v Dunkel and the decision of the Appellate Division of the Supreme Court of New York in Milliman v Rochester Ry Co [3 App Div 109; 39 NYS 274 (1896)] are applicable, and indeed the proper inference is to the opposite effect of that drawn by the trial judge.

293    See also: Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; 243 CLR 361 at [63]. Whether such a submission would have been accepted is not to the point for present purposes.

294    There was no dispute as to the process which Mr McNaughton took to calculate the offer which he considered should be made by Elanor to purchase the Centre. Essential to that process was an assessment of the likely rental income, because this constituted the income stream which would give rise to the return that Elanor would represent to the investors in its proposed managed investment scheme was achievable over the course of the investment, then contemplated to have an “investment horizon of approximately three years”: AB1669. Given these circumstances, and the nature of the evidence which Mr McNaughton gave, it is not obvious that the evidence should be treated as “unreliable” as opposed to being assessed against whether the evidence was objectively rational.

295    There is nothing unusual about notionally excluding income from a calculation undertaken to determine the likely return from an investment where it is considered that there is some doubt about that income being received. Mr McNaughton’s evidence was focussed on what inputs would have been used in his calculations.

296    Further, Mr McNaughton’s evidence explained various considerations relevant to an objective assessment of “reliance” in light of the commercial context. The commercial context included the purchase of a shopping centre and the attraction of external investment through a managed investment scheme. This involved matters which are not common knowledge and which were of material importance in assessing, objectively, whether Elanor suffered damage because of the respondents’ conduct. Elanor may have been criticised if it had not adduced evidence from Mr McNaughton to explain what he would have done if he had known the true position with respect to the arrears history of the Food Court Tenants. On a fair reading of the trial judge’s reasons, his Honour discounted the entirety of Mr McNaughton’s evidence on this topic as “unreliable” without explaining why it was unreliable in the particular circumstances.

297    There is one other aspect of the trial judge’s approach to Mr McNaughton’s evidence which should be mentioned. Mr McNaughton was cross-examined extensively in relation to his interest in the Centre arising from the mixed-use redevelopment potential of the site. The trial judge concluded that this potential “was a primary motivating factor” for the acquisition of the Centre: J[271]. This finding is addressed in more detail later. What is important for present purposes is that, in considering this aspect of the case, the trial judge observed that he was asked to make an adverse credibility finding concerning Mr McNaughton and then stated that it was “not necessary that I make a direct adverse credibility finding”. His Honour then stated at [J271]:

I approach his evidence by reference to the well-understood limitations that apply to self-serving evidence about reliance: once a litigant asserts that if it had not been misled, the outcome would have been different.

298    This is a reference to what his Honour had earlier stated at J[250]. His Honour then concluded that “the redevelopment potential of the site was a primary motivating factor to acquire the Centre” and stated at J[271]:

I also approach Mr McNaughton’s reliance evidence with caution as he is clearly a witness with an indirect interest in the success of this proceeding.

299    The trial judge’s adoption of this stance – which must have applied to an assessment of all of Mr McNaughton’s evidence – was not further explained.

300    Alceon submitted that the basis for the trial judge’s conclusion was obvious: “Mr McNaughton was one of two employees of Elanor with primary responsibility for the acquisition and remained, at the time of the trial, a senior employee at Elanor”. It is not clear that the trial judge was reasoning in that way.

301    If his Honour was reasoning in the way suggested by Alceon, two observations should be made.

302    First, it is regularly the case that employees of a party to litigation give evidence concerning the employee’s role in particular events central to the determination of litigation and which might affect their standing in the organisation. No doubt that is a matter which can be taken into account in assessing the evidence, but it does not necessarily or even ordinarily mean that the evidence must be treated with “caution”.

303    Secondly, it was not suggested by the respondents on appeal that it was put to Mr McNaughton, either in cross-examination or by the trial judge, that his evidence should be treated with “caution” for the reasons hypothesised by Alceon in its submissions.

304    The substance of what the trial judge stated, notwithstanding that his Honour considered it was “not necessary [to] make a direct adverse credibility finding”, is that Mr McNaughton’s evidence was not being accepted as truthful or as full and frank. As a matter of substance, his Honour was making an indirect adverse credibility finding. As mentioned, the basis for the adverse finding is not explained in the reasons. A reading of the transcript of Mr McNaughton’s cross-examination by reference to the contemporaneous documents and objectively established facts does not readily support the conclusion.

The arrears position of the Food Court Tenants

305    At J[264], the trial judge stated:

On these findings, the arrears position of individual Food Court Tenants was not a consideration which Elanor took into account at the time, more so, the position of three of those tenants.

306    The trial judge made the same finding at J[257]:

[T]he individual arrears position of any of the Food Court Tenants was simply not taken into account as a material factor in the overall assessment at the time.

307    It was uncontroversial that Elanor did not take into account the arrears position of the Food Court Tenants at the time Elanor’s board resolved to proceed at the price recommended by Mr McNaughton and Mr Baliva. That is the case that Elanor brought. Elanor’s case was that it was misled into thinking that there was no historical or actual arrears position of the Food Court Tenants and that – if it had known the true position – it would have calculated what it was prepared to offer differently. If it had known that the Food Court Tenants were in, and had a history of, arrears, it would have excluded the rent from the “at risk” tenancies in calculating its offer.

308    The “findings” the trial judge referred to at J[264], on which the ultimate finding was based, are those set out at J[260] to J[263], by reference to four matters. The first matter was explained in the following way at J[260]:

[260]    First, I am not satisfied that if Mr McNaughton and Mr Baliva had known that three Food Court Tenants were in arrears as at July 2017, that they would not have recommended to the board to proceed. For reasons that I have explained that quantum of rental arrears is insignificant in the context of an intended acquisition in excess of $55 million, with 46 other tenants, including Woolworths as the major anchor tenant, with a gross fully let net income estimated to 1 December 2017 of $4.26 million and a net passing operating income of $3.9 million per annum.

309    There are three problems with this reasoning.

310    First, it is confined to a conclusion as to what Mr McNaughton and Mr Baliva would have done had they known that three Food Court Tenants were in arrears as at July 2017 and not also whether there was a history of arrears. As to the history of arrears:

(a)    Mr McNaughton had also reviewed, at least briefly, the Data Room Arrears Reports for the months of December 2016 to June 2016. These did not show any arrears for any of the Food Court Tenants. If they had shown a history of arrears – for example along the lines of those contained in the Discovered Arrears Reports – it is reasonable to assume that he would have raised the issue with Mr Hamilton and that Mr McNaughton and Mr Hamilton would have further pursued the issue in order to determine the correct position.

(b)    Mr Hamilton and Mr McNaughton were led to believe, by the respondents’ conduct, that there was no history of arrears on the part of the Food Court Tenants as at 30 August 2017 when Mr Hamilton conducted his tenant by tenant review with Mr Frenil Shah.

311    Secondly, it is confined to a conclusion that only three tenants were in arrears as at July 2017, which is incorrect for the reasons given earlier.

312    Thirdly, even in the absence of the first two matters just discussed, the trial judge’s conclusion that the “quantum of rental arrears is insignificant in the context of an intended acquisition in excess of $55 million” suggests a material misunderstanding of the evidence and the point which was being made.

313    The quantum of the rental arrears of the three tenants referred to by the trial judge was $19,183.88 on the trial judge’s assessment: J[218]. Of course that is insignificant compared to $55.25 million. The real issue which Elanor raised for consideration was whether Mr McNaughton would have calculated the purchase price by reference to a different income stream, namely by excluding the income from certain tenancies on the basis that they were sufficiently “at risk” as for it to be prudent to exclude that income from the relevant calculation. Mr McNaughton used a net operating passing income of $3,907,170 to derive the purchase price he was prepared to recommend. He would have excluded the gross rent of the tenants at risk: McNaughton 1 at [238(c)]. Depending on the number, he may have added back some if he considered the relevant tenancies could be relet within a year. The annual gross rent for the three tenants referred to by the trial judge as having rental arrears as at July 2017 was $245,417: AB1770. If Mr McNaughton had used net operating passing income of $3,661,753 ($3,907,170 - $245,417), the resulting offer would have been $51.8 million adopting Mr McNaughton’s yield of 7% and his process of calculation (without adding back any tenancies).

314    The second matter said to support the conclusion at J[264] was explained in the following way at J[261]:

[261]    Secondly, Mr McNaughton was aware that the net rental income figures were estimates to 1 December 2017. It is the very nature of an estimate, that it might not be realised. He was also provided with the revised financial figures including the tenancy reports which disclosed that seven of the Food Court Tenants had no trading history as at August 2017. He was aware that the casual dining precinct had only recently been developed. He knew that it was populated by small business proprietors, not by national retailers. He had the benefit of the report from Mr Schneider that on 28 August 2017, the Centre was quiet and that all food retailers were “extremely quiet”. Mr McNaughton was aware that the casual dining precinct was unproven in terms of trading and financial performance. I reject Mr McNaughton’s evidence that he could not place reliance upon the monthly trading figures that were provided to him as part of the financial information on 2 August 2017. As I have explained that document clearly conveyed that a number of the Food Court Tenants had either not commenced trading or had only recently commenced trading. The conclusion which I draw from these findings is that Mr McNaughton was prepared to accept the risk that one or more of the Food Court Tenants may be in arrears or may subsequently fall into arrears in the event of acquisition of the Centre.

315    The fact that the rental incomes figures as at 1 December 2017 were estimates was neither disputed nor particularly probative of what Mr McNaughton would have done if he knew the true arrears position in relation to the Food Court Tenants, including the arrears history.

316    There was nothing unreliable about the forecast if the tenants were likely to be paying rent as at 1 December 2017. As noted earlier, the real issue was what Mr McNaughton would have done if the true position had been disclosed as to the arrears, including the arrears history.

317    The trial judge attached considerable significance to one of the tabs of the Excel spreadsheet attached to the email sent on 2 August 2017 which contained turnover figures. As noted above, the trial judge stated:

I reject Mr McNaughton’s evidence that he could not place reliance upon the monthly trading figures that were provided to him as part of the financial information on 2 August 2017. As I have explained that document clearly conveyed that a number of the Food Court Tenants had either not commenced trading or had only recently commenced trading.

318    What the trial judge had earlier explained is contained at J[63] – [66]:

[63]    Something more needs to be said about the revised financial figures that were provided on 2 August 2017. The covering email to Mr McNaughton attached an Excel spreadsheet with a series of tabs. One was labelled “Bluewater Square turnover figures” divided as between the various tenants which included information about whether a tenant had reported trading data and if so, the month of the first report. Some comments were also recorded in relation to relevant tenants.

[64]    The effect of that data is accurately summarised in a table contained in the closing submissions of Alceon:

[65]    Mr McNaughton recalled the spreadsheet when cross-examined as to its content but disputed it as a reliable record as to when those tenants commenced trading. On his evidence it is the tenancy schedule, being that tab on the Excel spreadsheet, which is the reliable source of that information. Similar turnover reports for March 2017 were available in the data room and were viewed by Mr McNaughton. Mr McNaughton gave similar evidence to that effect in answer to a number of questions put to him in cross-examination. On his evidence the turnover data is not a reliable indicator of the commencement of a tenancy because it depends upon the accuracy of the reporting of the tenant, which accuracy cannot be assumed in the case of small operators. He described these as “mum and dad operators” who sometimes prefer cash sales which are not subsequently disclosed.

[66]    Whilst that fact may impact on the quantum of the reported turnover, I do not find Mr McNaughton’s explanation to be satisfactory. The Food Court Tenant leases were in standard form. By cl 3.2 each tenant was obliged to “keep complete and accurate accounting records” of all transactions relating to the leased premises including data relevant to gross sales. Not later than seven days after the end of each calendar month, the tenant was obliged to give to Alceon a statement in reasonable detail of the gross sales for the previous month. By cl 3.3, Alceon had the right to inspect and have audited the tenant’s records. I find that the turnover data was a reliable indicator as to whether tenants had or had not commenced to trade because it was provided in satisfaction of a lease obligation. Logically the commencement of trading would be reflected in a monthly gross sales amount reported by each of the Food Court Tenants to Alceon. Correspondingly, the absence of a reported amount points strongly to the conclusion that a tenant had not commenced trading or at least should have invited further inquiry.

319    Ultimately, it may be that little turns on this aspect of Mr McNaughton’s evidence because, as mentioned, Mr McNaughton did not deny knowing (at various points in time) that many of the Food Court Tenants had not commenced trading or had only recently commenced trading. However, given that the trial judge rejected his evidence (and that this appears to have affected the trial judge’s acceptance of Mr McNaughton’s evidence more generally) it is necessary to point out a number of matters.

320    First, much of Mr McNaughton’s evidence concerning reliance on the turnover schedule was directed to the reliability of the figures provided rather than what they suggested about the lease commencement date. Thus, for example, he stated that “we don’t place a lot of reliance on sales figures other than Woolworths and other major tenants”: AB2931.28. Later, he gave evidence to the effect that, in assessing whether a tenant might fall into arrears, he gave less regard to sales data where smaller operators were concerned because of the potential for such data to be affected by “people taking cash” or “not wanting to clear it for tax and things like that”: AB2971. None of this evidence is surprising and it is objectively supported by the fact that many tenants apparently did not report turnover figures, as discussed below.

321    Secondly, to the extent Mr McNaughton’s evidence was that he did not rely on the turnover schedule for the lease commencement dates, it should be emphasised that the context was that the 2 August 2017 email included as spreadsheets:

(a)    The “Bluewater Square Turnover Figures” which did not purport to address the lease commencement dates or, as is more fully set out below, the turnover figures for a large number of tenants.

(b)    The “Bluewater Square Tenancy Schedule” which expressly identified the lease commencement dates for each lease.

322    Thirdly, in relation to those Food Court Tenants where turnover figures were reported on the turnover schedule, that fact is probative of the fact that the relevant lease had commenced, but it is not determinative of when the lease commenced. This is objectively established by the facts. In relation to Mumbai Blues, the turnover schedule only contains turnover figures for June 2017 and the comment “12 days of actual trading converted to full month”. It was uncontroversial that the Mumbai Blues lease commenced on 1 May 2017: AB2698 at [91]; AB2735 at [7]; J[122]. Accordingly, if Mr McNaughton had relied on the turnover schedule to determine the lease commencement date for Mumbai Blues he would have been misled. A similar example is provided by Redcliffe Noodle Kitchen.

323    Fourthly, in relation to those Food Court Tenants where no turnover figures were reported, it is difficult to draw the conclusion that the relevant lease had not commenced even by drawing an inference, as the trial judge did at J[66], that the tenants were sticklers for compliance with the obligations contained in their leases. That inference was unlikely on an examination of all of the evidence. It was uncontroversial that Mass Nutrition’s lease commenced on 1 May 2017: J[122]. No turnover is contained in the turnover schedule for Mass Nutrition for May or June 2017. It was uncontroversial that Kebab Express’s lease commenced on 1 June 2017: J[122]. No turnover was reported for Kebab Express for June 2017. If Mr McNaughton had relied on the turnover schedule to determine the lease commencement dates in these respects, he would have been misled.

324    Fifthly, the table referred to by the trial judge at J[64], is apt to mislead in suggesting that an inference could safely be drawn from the turnover schedule that the lease had not commenced where no turnover figures for a particular tenant were contained in it. What inference can be drawn must be assessed from the whole of the turnover schedule. There were 49 tenancies in the Centre, five of which were vacant, leaving 44 which could have supplied turnover figures. Leaving aside the nine Food Court Tenants, of the balance of 35 tenancies, the spreadsheet revealed no monthly trading for 16 tenancies. Accordingly, including the fact that it showed no turnover in respect of four of the Food Court Tenants, it contained no monthly turnover figures for 20 tenancies out of the 44 non-vacant lots. Put simply, no turnover figures were contained in the turnover schedule for 45% of the Centre’s tenancies. There was no dispute that the Centre was 96% let. One possible explanation for this is that not all tenancies had to report turnover figures. That might be the case or it might not. Woolworths, Terry White Chemist, Lucky Charm, What’s Hot, Brazilian Beauty, Adora Nails, Flight Centre and many more reported turnover, whilst those which did not included Pure Serenity Massage, a medical practice and lawyers. It is difficult to accept that a reasonable reader of the schedule would think that Brazilian Beauty had an obligation to report turnover and Pure Serenity Massage did not.

325    The trial judge’s reliance at J[66] on the terms of the leases also contains the difficulty that it assumes that Mr McNaughton knew the particular terms of each of the 44 leases in the Centre. Without that information, he could not have known which tenancies were obliged to report turnover.

326    A reasonable observer of the turnover schedule could not have considered that it was reliable as indicating the dates of commencement of the various leases of the Food Court Tenants. A fortiori, when a schedule was also provided with the turnover schedule which expressly stated the lease commencement dates.

327    At best, the turnover schedule contained a partial account of the turnover figures. Mr McNaughton’s evidence that he did not place reliance on the turnover schedule in order to determine the lease commencement dates was entirely rational. So too was his evidence that he did not rely on the turnover figures contained within it. The trial judge’s rejection of Mr McNaughton’s evidence that he could not place reliance on the monthly turnover figures contained in the spreadsheet does not take into account that the spreadsheet could not objectively be regarded as reliable, in particular as reliably revealing the lease commencement dates.

328    As to the trial judge’s observation at J[261] that Mr McNaughton had the “benefit of the report from Mr Schneider that on 28 August 2017, the Centre was quiet and that all food retailers were ‘extremely quiet’”, this was one person’s observations over a short period of time at a particular time of the day. Any reasonable person in Mr McNaughton’s position would have relied on the objective data which was provided and what was said by those with knowledge of the Centre operations over an extended period. It was two days later that Mr Hamilton was to meet with Mr Frenil Shah.

329    The third matter said to support the conclusion at J[264] was explained in the following way at J[262]:

[262]    Thirdly, Mr McNaughton plainly knew that to have any chance of acquiring the Centre, Elanor was required to submit an offer at more than $54,750,000. In undertaking his calculations, he applied a yield of 7% which was most favourable in comparison to the comparable sales that he considered. It will be recalled that his list of comparable sales indicated yields for shopping centres in the form of neighbourhood centres in Queensland at between 5.57% at the lower end and 8.97% at the upper. He was very familiar with the Gladstone Square Shopping Centre, with an initial yield of 6.74% and a core market yield of 7.5%. As was explained in the investor overview that formed a component of the report to the board, the 7% yield represent[ed] a discount to prevailing market yields. Elanor was plainly keen to acquire the Centre. The first expression of interest was submitted on 30 May 2017 for a price at $54,750,000 without any investigation by Mr McNaughton as to the position of individual tenancies within the casual dining precinct.

330    The facts as proved, objectively assessed, indicate that Elanor was keen to acquire the Centre. The facts also indicate that it carefully assessed what price it was prepared to pay, as one would expect. Elanor was a sophisticated investor. It was inherently unlikely to purchase a shopping centre otherwise than by attempting accurately to predict the returns it could expect. It did so by reference to the expected rental income. Mr McNaughton adopted a yield of 7%. This was just under the middle of the range he had examined, namely 5.57% at the lower end and 8.97% at the upper. In the Investor Overview which was given to the board it was stated that “the 7% yield represent[ed] a discount to prevailing market yields”: AB1669. This expression of opinion was a statement made in the context of seeking to attract investors to the managed investment scheme. Elanor’s interests lay in putting the investment forward in the best light possible and in ensuring that the returns it forecast to participants in the managed investment scheme were accurate.

331    The fact that the first expression of interest was submitted on 30 May 2017 at $54,750,000 without any investigation by Mr McNaughton as to the position of individual tenancies within the casual dining precinct does not bear the significance attributed by the trial judge. Expressions of interest were sought on 2 May 2017 with a closing date of 30 May 2017, by a detailed Information Memorandum issued by Alceon. This contained detailed information about the rental returns which were expected. Elanor was not the only interested party. As Mr McNaughton repeatedly explained in his evidence, the expression of interest was subject to a number of matters including due diligence. Contrary to the assumption implicit in the trial judge’s reasoning, there is nothing unusual about not investigating the position of individual tenancies for the purposes only of expressing interest given those circumstances. If, during that hypothetical due diligence, Elanor had been provided with the Discovered Arrears Reports or received full and frank answers to its tenant-by-tenant review from Mr Frenil Shah, Elanor may well have reconsidered its position with respect to the price stipulated in its expression of interest.

332    The fourth matter said to support the conclusion at J[264] was explained in the following way at J[263]:

[263]    Fourthly, the forecast net passing income to 1 December 2017 of $3,907,170 (the figure that Mr McNaughton based his price calculation upon) included a net annual rental payable by Woolworths of $1,145,000 and $803,061 payable by the two mini-major tenants. Of the balance, the most substantial portion payable was the total rent for the 28 specialty shops. As I have explained, the quantum of rent payable by the three Food Court Tenants in arrears as at July 2017 is insignificant in the context of these figures. It is also the case that Elanor had been informed through the Location IQ report that it should consider more national brands for food catering to replace Food Court Tenants upon cessation of their leases. I find that this advice formed the basis of the statement which was subsequently made in the finalised version of the investment overview that was provided to prospective syndicate members on 28 September 2017, where it is noted under the heading “syndicate and strategy” that the strategy is to, inter alia, “actively asset manage the Property by implementing repositioning, leasing, tenant remixing and marketing to optimise the income and value of the property.” Mr McNaughton gave evidence to the effect that he considered that Elanor could generate a 12% internal rate of return, by undertaking such remixing.

333    The first part of this reasoning, concerning the “quantum of rent payable by the three Food Court Tenants in arrears as at July 2017”, has been addressed above.

334    The second part of this reasoning has a tenuous relationship to the question of whether Elanor suffered damage because of the respondents’ conduct. At most it indicates that Elanor wanted to manage the asset responsibly, with a view to maximising the return to participants in the managed investment scheme by maximising rental income.

335    In summary, the four matters referred to by the trial judge for concluding at J[264] that “the arrears position of individual Food Court Tenants was not a consideration which Elanor took into account” do not provide significant support for a conclusion that Mr McNaughton would have recommended that Elanor purchase the Centre for the price it did even if he had not been misled as to the arrears position of the Food Court Tenants. It is more likely that he would have reassessed the position as he stated in his evidence.

The development potential

336    The second overarching finding made by the trial judge which led to the conclusion that “reliance” was not established was the finding “that the redevelopment potential of the site was a primary motivating factor to acquire the Centre”: J[271].

337    The reasoning for this conclusion was given in J[265] to [271]:

[265]    [T]here is the extensive evidence about what investigations Mr McNaughton undertook about the potential mixed-use redevelopment of the site and whether it was a primary motivating factor for the acquisition of the Centre, contrary to the claim that the arrears position of the nine Food Court Tenants was relied upon. I have set out above my factual findings on what was done and when. Mr McNaughton was extensively cross-examined on this issue. He did not mention his inquiries with the Moreton Bay Regional Council, his consideration of the Bureau Proberts report, his consideration of the Urbis town planning report or his direct contact with Urbis in his affidavit evidence-in-chief. In cross-examination, he denied that what attracted him to the Centre was the mixed-use development potential answering:

Every asset that we buy, Elanor Investors, we look to get a stable income for our investors, and then hope that there’s some upside potential as well. So what attracted us to Bluewater Square was the stable income coming from the tenant base. The upside potential to build something above the Centre, we placed [no] reliance on it, but we hoped that something can happen in the future.

You seriously suggest that you placed [no] reliance on this development potential when making that second expression of interest?---Correct. As I said, we – we hope that there will be upside potential. If you look at our information memorandum that we published for our investors, we put no numbers around what that upside potential is. We focus solely on the income.

I didn’t ask you any question about an information memorandum that you provided to your investors, did I?---No.

Please don’t volunteer information. Do you understand?---I understand. I’m sorry.

[266]    At various points in his cross-examination, Mr McNaughton gave answers to similar effect. I reject his evidence. Mr McNaughton was aware from the outset that the site had redevelopment potential, which was stated and highlighted in the Information Memorandum. The fourth page of the document highlights development of mixed use buildings in the immediate vicinity of the Centre, while other pages in the document summarise the town planning controls to the effect that the Moreton Bay Regional Council had identified the precinct “as a key area for potential increased density” and then by reference to the Urbis report highlights the site potential for a mixed use development comprising two buildings of five stories each constructed above the existing development. Montages from the Bureau Proberts report are reproduced in the Urbis report which favourably considers one of the concept schemes to develop and use the site for the purpose of 85 residential units.

[267]    If Mr McNaughton was only interested in the redevelopment as having some “upside potential”, then it is difficult to understand why he then made a direct inquiry of the Moreton Bay Regional Council and Urbis. On 22 August 2017, he emailed Mr Liam Proberts, noting that he had viewed the architectural report in the data room and requested a discussion because “we too feel there is scope to develop the centre into a mixed use scheme in the medium to long-term.” On 23 August 2017, Mr McNaughton emailed Ms Lam at Urbis and in substance repeated the statement that he had made to Mr Proberts. On 23 August 2017, McNaughton also emailed the Moreton Bay Regional Council noting that under the current zoning the Centre “would appear to have strong medium to long term prospects to be redeveloped into a mixed-use project” and requested a meeting about strategic planning. He attended a meeting with Mr Proberts on 23 August 2017, the file note for which discloses that there was an in-depth discussion about the potential to redevelop the Centre. He provided the Bureau Proberts schemes by email to the council on 24 August 2017. With Mr Baliva, he attended a pre-lodgement conference with officers of the council on 5 September 2017, and was provided with a detailed summary of the town planning controls, and what would be required for a compliant development.

[268]    The result of these extensive inquiries was recorded by Mr McNaughton in the due diligence checklist as provided to the board prior to 8 September 2017 and which was then highlighted in the investment overview attached to the board papers and the subsequent more detailed version provided to investors of 28 September 2017.

[269]    Elanor subsequently lodged an application for redevelopment of the site on 16 December 2022. The description of the proposal is:

Request to Change (Other) – Material Change of Use – Development Permit for Shopping Centre, Short Term Accommodation (142 rooms) Function Facility and Bar and Reconfiguring a Lot – Development Permit for Subdivision (1 Standard Format and 1 Volumetric Lot).

[270]    The application was approved, by grant of a planning permit on 24 May 2023, subject to conditions.

[271]    I reject the evidence of Mr McNaughton as inconsistent with what he did at the time, the focus if [sic] his inquiries and the degree of effort that he expended in investigating the development potential of the site. The respondents also invite me to reject his evidence for credibility reasons being the failure of Elanor to make discovery of documents relating to these inquiries and what is said to be unsatisfactory aspects of some of the evidence given by Mr McNaughton being the absence of any reference to these inquiries in his evidence-in-chief and his answers in cross-examination as implausibly inconsistent with the contemporaneous documents. It is not necessary that I make a direct adverse credibility finding. I approach his evidence by reference to the well-understood limitations that apply to self-serving evidence about reliance: once a litigant asserts that if it had not been misled, the outcome would have been different. I find, based on the contemporaneous documents, that the redevelopment potential of the site was a primary motivating factor to acquire the Centre. I also approach Mr McNaughton’s reliance evidence with caution as he is clearly a witness with an indirect interest in the success of this proceeding.

338    Observations have earlier been made about the trial judge’s approach in treating Mr McNaughton’s evidence with caution because he had an indirect interest in the success of the litigation. However, one further observation should be made. As is explained below, Mr McNaughton’s evidence extracted at J[265] was unremarkable. The trial judge was wrong to “reject the evidence of Mr McNaughton as inconsistent with what he did at the time”: J[271].

339    Leaving credibility issues to one side, the difficulty with this aspect of the trial judge’s reasoning is that it does not furnish a sound basis to deny ‘reliance’ on – or, more accurately, to deny that damage was sustained because of – the impugned conduct in a way material to the statutory question under s 236 of the ACL as it applied to the facts.

340    It is to be accepted that a major reason why Elanor was interested in the site was because of its redevelopment potential. Elanor recognised, as the third aspect of the Blue Water Square Syndicate’s strategy, that there was a “[s]ignificant medium term expansion potential into a mixed use scheme given favourable zoning” and that it was “well positioned in a coastal location with new transport infrastructure”: AB1903. Elanor had thoroughly investigated this potential and concluded that it existed. It was not costed, but it could not be open to serious doubt that Elanor considered a future redevelopment was likely to be profitable if it could be undertaken.

341    It may also be accepted that Elanor considered that an investment in the Syndicate should be “viewed as medium to long term”: AB1900. It is tolerably clear that Elanor would continue looking into the redevelopment potential. Although the Investment Overview sent to the board on 8 September 2017 stated that the investment horizon was “approximately 3 years” (AB1668), the Investment Memorandum dated 28 September 2017 stated that the Manager of the Syndicate would “review exit / liquidity strategies with an investment horizon of approximately 3 to 5 years or more”: AB1905.

342    The redevelopment potential was a significant reason for Elanor’s interest in this particular site, and its purchase of it. The trial judge was not wrong to conclude that the redevelopment potential was “a primary motivating factor” for the purchase, although the meaning of the word “primary” in this context is unclear.

343    On the other hand, it is not possible reasonably to conclude otherwise than that the purchase price was determined in accordance with an assessment of the likely return to Syndicate investors over an investment horizon of three years. This depended on rental income and not on profit from any future potential redevelopment. Mr McNaughton had given evidence as to how he calculated the purchase price. In summary, Mr McNaughton applied a yield of 7% to the net operating passing income of $3,907,170 to calculate an amount of $55,816,714. Mr McNaughton subtracted $500,000 on account of his estimate of the expected future capital expenditure, based on 1% of the purchase price and then rounded down to $55.25 million. At the time, Mr McNaughton was aware that there were five vacant tenancies: J[68]. He addressed this by including a condition in the expression of interest that Alceon provide a rental income guarantee equivalent to two years’ gross market rent ($650,000) for any vacant tenancy as at the settlement date.

344    Mr McNaughton’s evidence on that topic was unchallenged, it was cogent, it was what would have been expected in the commercial scenario, it was consistent with the contemporaneous documents and it was accepted by the trial judge: J[62].

345    Mr McNaughton and Mr Baliva discussed Mr McNaughton’s calculations and Mr Baliva agreed with his assessment and methodology. Mr McNaughton’s calculations formed the basis of the recommendations to the board and the calculations of what investors could expect by way of return over 3 years.

346    The evidence given by Mr McNaughton set out by the trial judge at J[265] was unremarkable. Mr McNaughton’s evidence was consistent with the trial judge’s acceptance of his evidence as to how the offer was calculated, it was consistent with the Investment Overview provided to the board on 8 September 2017 and with the Information Memorandum sent to potential investors on 28 September 2017. All of the contemporaneous documents indicated that the purchase price was calculated by reference to the rental income from the Centre. All of the contemporaneous documents indicated that the anticipated return to Syndicate investors was determined by reference to the rental income from the Centre. No document suggested that the purchase price was determined by reference to possible profits from a potential redevelopment. Indeed, as would be expected, no calculations had been made in relation to a potential future development. There was no examination of what redevelopment costs would be or of what proceeds of sale might be expected.

347    It is difficult to see what it is in the evidence which Mr McNaughton gave, extracted at J[265], which troubled the trial judge. There is some ambiguity in the question: “You seriously suggest that you placed [no] reliance on this development potential when making that second expression of interest?” It could be interpreted as asking whether Mr McNaughton was suggesting that the development potential was of no interest; but, in context, the question was appropriately understood by Mr McNaughton as being directed to his formulation of the offer price, not whether the development potential was one of the factors that motivated Elanor to purchase the Centre.

348    The trial judge considered it important that an “entire page” in the Investment Overview document provided to the board on 8 September 2017 was “devoted to the medium-term development potential of the site”: at J[94] and [256]. His Honour compared this to the income information contained in the Investment Overview in the following way at J[257]:

[257]    There is no reference in those documents to the forecast net operating income (fully leased) or net operating income (passing) figures as contained in the Information Memorandum [sent on 2 May 2017] or as updated in the financial documents provided to Mr McNaughton on 2 August 2017. What was considered as important by Mr McNaughton and Mr Baliva to convey to the board in relation to the calculation of the purchase price of $55.25 million, is that it was based on a yield of 7.7% when fully leased or 7% passing. On those figures, one derives a passing net rental income of $3,867,500, which is less than the figure of $3,907,170, which Mr McNaughton took from the updated financial information. Nor is there any reference in the material provided to the board as to the income payable by individual tenants, more particularly the Food Court Tenants. In combination, the relatively detailed focus on the potential redevelopment of the site, when compared with the absence of attention to the estimated passing net rental income and the absence of any reference to risk that any tenancy may default, is consistent with the fact that the individual arrears position of any of the Food Court Tenants was simply not taken into account as a material factor in the overall assessment at the time.

349    There is no way to read the Investment Overview otherwise than as calculating the returns from the proposed investment on the basis of rental income to be derived from the Centre over 3 years. It is not to the point that future development opportunities were explained in an “entire page” and that this was thought to be longer or more detailed than the explanation of the calculations used to determine the returns to investors. The fact is that the Investment Overview as a whole is self-evidently directed to the likely returns from investment income derived from the rents in the Centre over a three-year investment horizon. If it be relevant, it is far from clear that less than one page of the document is devoted to calculation of investment returns. The Investment Overview was, in these respects, consistent with the Information Memorandum dated 28 September 2017.

350    As to the lack of reference to the individual arrears positions of any of the Food Court Tenants, this has been addressed above. The material which Mr McNaughton had seen led him to believe that there was no serious “arrears position” to raise and Mr Hamilton had not been told otherwise when he directly asked questions to elicit such information. The fact that the “individual arrears position of any of the Food Court Tenants was … not taken into account as a material factor in the overall assessment” was the very point of the case Elanor brought. If it had not been misled, the position of the Food Court Tenants would have been taken into account.

351    It follows that the trial judge’s analysis in relation to ‘reliance’ is affected by error.

Did Elanor suffer loss because of the conduct?

352    The question whether Elanor suffered damage because of the impugned conduct requires an analysis of what Elanor did because of the conduct and what would probably have occurred absent the impugned conduct. This involves a consideration of all of the circumstances as established by the evidence and the drawing of inferences from the objective facts. As mentioned earlier, the weight to be attributed to direct evidence as to what a person would have done in hypothetical circumstances depends on the context and the nature of the evidence.

353    There was no issue that the state of arrears, and the existence or not of a history of arrears, was a centrally important consideration to the decision to purchase and to the amount to offer. That was evidenced by the terms of Mr Hamilton’s engagement and his questions of Mr Frenil Shah. It was acknowledged by Mr Frenil Shah in cross-examination and accords with the fact that it was the rental income which supplied the return on investment. Further, the existence of vacancies was objectively of central importance as was established by the fact that the Heads of Agreement entered into on 18 August 2017 provided for Alceon to grant a rental income guarantee equivalent to two years’ gross market rent for any tenancies which were not subject to a lease at the date of settlement, as per the financials provided as at 1 December 2017 – see [38] above.

354    If the impugned conduct had not occurred it is objectively likely that Mr McNaughton would have known that various Food Court Tenants had a history of arrears, some longer than others. It is likely that he would have further investigated the position of each of the Food Court Tenants given the history of arrears. He knew that many had only recently commenced trading and this would have been taken into account in his assessment. Indeed, if the conduct had not occurred, it is likely that Mr McNaughton, either directly or through Mr Hamilton, would have made inquiries which would have resulted in the Discovered Arrears Reports (which then existed) being disclosed or other material coming to light which indicated that there were arrears issues with the Food Court Tenants. Whether or not the Discovered Arrears Reports were in all respects accurate is not to the point in this respect, although it is apparent that Savills and CPRAM considered that those reports were generally accurate because they conducted their business operations on the basis of them, including seeking unpaid rent. The point is that, whether accurate in all respects or not, the arrears position as disclosed in Savills’ Tenant Arrears Reports would have raised a concern and resulted in further investigation.

355    Mr Hamilton accepted that it is difficult to determine whether a tenant was at risk of falling into arrears from one or two months trading and that it may take up to a year to make a judgment on that question. Also, the trial judge recorded that Mr Hamilton “noted as a threat to the trading performance of the new external restaurant precinct, that it was unproven and that it remained to be seen if it would provide ‘the hoped for increase in sales and customer traffic’”: J[221].

356    Two matters should be noted about this. First, the “external restaurant precinct” comprised Mumbai Blues, Thai Me Down and Redcliffe Noodle Kitchen only.

357    Secondly, on the basis of his investigations – which did not include knowledge of the actual arrears history of the various Food Court Tenants – Mr Hamilton’s assessment was that there would only be five vacancies as at 1 December 2017. These were the five existing vacancies. It follows that Mr Hamilton did not consider the Food Court Tenants to be “at risk” in the sense of being prudently treated as vacant tenancies. The natural inference to be drawn from the established facts is that, if Mr Hamilton had known the true position, his assessment is likely to have been different, notwithstanding that, as a general proposition, it is difficult to project how a tenant might fare after only a few months trading. The length of time for which a tenant is in arrears is obviously relevant. However, it is not a good sign if a tenant who has only recently commenced is unable to meet its obligations on time. The number of Food Court Tenants which had arrears issues, even taking into account the short time most of them had traded, would have raised more serious concerns about the viability of the external restaurant precinct and concerns about the restaurant precincts in combination notwithstanding the short period of time for which many had traded.

358    If the misleading conduct had not occurred, in addition to coming to know about the full history of arrears before July 2017, it is likely that Mr McNaughton and Mr Hamilton would have come to know the level of arrears past July 2017. That is because Mr Frenil Shah would have answered the questions he was asked by Mr Hamilton on 30 August 2017 truthfully and that, in turn, is likely to have led Mr McNaughton and Mr Hamilton to make further inquiries and to continue to monitor the level of arrears – see: McNaughton 1 at [62] to [68].

359    The objective facts included:

(a)    Elanor’s offer price was calculated by reference to the likely rental income.

(b)    Elanor intended to, and did, purchase the Centre in its capacity as trustee of the Bluewater Square Syndicate, an unregistered managed investment scheme.

(c)    The rental income was used to establish the market value for bank valuation purposes which in turn was used to determine the level of borrowings: AB1905.

(d)    Elanor calculated the return to investors by reference to rental income over a three year term: AB1925.

360    Mr McNaughton gave direct evidence to the effect that he would have excluded the gross rent from “at risk” tenants in calculating the offer price and considered whether to add some back. He gave evidence as to what he would have done by reference to each tenant. Given his experience and the fact that the investment was to be marketed to wholesale clients and sophisticated investors, it is inherently unlikely that Mr McNaughton would have been prepared to put to one side serious concerns about the reliability of the income stream, and consequently put forward a purchase price recommendation which he considered to be incorrect or open to serious doubt.

361    Mr McNaughton’s evidence in his first affidavit included:

[55]    In preparing the report with Michael Baliva to go to the Board in respect of purchasing the Property, it was very important to me to ascertain what tenants in the Centre were ‘at risk’ tenants. An ‘at risk’ tenant is a tenant I deemed at risk of abandoning their lease. If I deemed a tenant to be ‘at risk’, then I ruled them out of the Passing Income for the Centre and classified that tenancy as vacant. I did this because Elanor does not receive income from a lost tenancy, so I consider such tenancies to be lost. Even after a tenant is replaced (which could take a significant period of time), Elanor loses further income during the period incentives are in place for the new tenant and has to contribute to their fit out. I considered ‘at risk’ tenants to be those having difficulty paying rent or other charges and fees, having current or historical arrears or who may fall into arrears in the future.

362    Mr McNaughton further explained the concept of an “at risk” tenant in his first affidavit – see: McNaughton 1 at [62] to [70]. It is clear that it is a matter of degree, but – for example – Mr McNaughton would have been concerned by tenants paying late (noting the rent was due on the first of each month), particularly if that occurred repeatedly: at [62]. He would have been concerned if tenants were in arrears past 30 days on multiple occasions: at [63]. Payments of “bulk or rounded” amounts, being amounts of two or more months, would cause concern because they would indicate to Mr McNaughton an inability to pay rent as and when it fell due and might suggest that there had been a cash injection such as a loan: at [64].

363    Mr McNaughton further explained the removal of “at risk” tenants from his consideration of an appropriate offer price in the following way:

[56]    Taking ‘at risk’ tenancies out of the Passing Income has two consequences. Firstly, the purchase price I calculate to achieve the 7% yield will change. A lower Passing Income will mean a lower purchase price.

[57]    Secondly, if a significant number of tenants are ‘vacant tenants’, I would view the Centre as riskier overall. A significant number of vacant tenants may indicate the Centre had too many tenancies to fill. This may be because of the population base surrounding the shopping centre is low or there are various competitors close by. I would also consider that a portion of these tenancies may never be filled and are ‘permanent vacancies’.

[58]    Further, with significant vacancies, the tenancy mix may not be right. The vacancies may relate to those tenants who did not fit into the Centre. If so, the tenancy mix would need to change.

[59]     When considering a change in tenancy mix (and its impact on the purchase price) I take a cautionary approach. I would consider the lowest possible rate of return for Elanor. When there are significant vacant tenancies in a similar area, I would consider changing the lettable space’s purpose entirely. For example, the vacant tenancy could be consolidated with others to become a larger tenant, for example a cinema, day care centre, or sporting/games tenant. If that occurred, significant expenditure is required to structurally change the Centre and the space would remain vacant for a longer period while those works were undertaken.

[60]     Either of the above scenarios (permanent vacancies or structural change to create a new usage) would create longer term vacant space in the Centre. Significant vacant space in the Centre also creates the higher risk that other tenancies vacate. It is likely to concern existing tenants in the Centre. It is also harder to attract new tenancies when there are a large number of vacancies.

[61]     All the above factors impact the rate of return sought by Elanor. They increase the risk of a lower yield from the Centre for what I consider a significant period. The investment yield sought by Elanor rises as the risk inherent in purchasing the Centre rises.

364    As noted earlier, Elanor conceded that Kebab Express, Thai Me Down and Mass Nutrition would not have been treated by Mr McNaughton as “at risk” or excluded from his determination of an appropriate offer price. In light of that concession and the conclusions identified earlier in relation to the history and state of arrears, it is likely that Mr McNaughton would have excluded the remaining six Food Court Tenants from his calculation of the appropriate offer price. He may have added some back if he considered that the resulting vacancy could be relet. Mr Hamilton’s due diligence flagged six tenants as being to some degree “at risk”, one of which was Suhi Kuni: McNaughton 1 at [71]. None of the other Food Court Tenants were mentioned. Generally, the reason for Mr Hamilton’s conclusion that the six were to some degree at risk was the occupancy cost ratio. Whilst Mr McNaughton did not consider that six such tenancies was “material to the decision to proceed with the investment”, if the number had been higher (for example, by the addition of another six Food Court Tenants) that would have had an impact on his consideration of the price and consideration would have been given whether to proceed with the investment: at [72].

365    Given the history of arrears and the number of Food Court Tenants involved, it would have been unreasonable to assume that this income as a whole was a secure line of income. The arrears position of the Food Court Tenants was objectively suggestive of a problem with the restaurant precincts. This is so notwithstanding that the trading history was relatively brief for all of the Food Court Tenants apart from Bel Cibo and Sushi Kuni. Excluding one or more of the Food Court Tenants from the calculation of the appropriate offer price would necessarily have resulted in an offer less than $55.25 million. The accepted position of the parties was that, in that eventuality, no transaction would have eventuated.

366    At this point, it is convenient to address two contentions put by the respondents.

Ground 2 of the respondents’ notices of contention

367    By Ground 2 of the respondents’ notices of contention, Alceon and CPRAM contend that Elanor failed to establish that it relied on the pleaded misleading or deceptive conduct because Elanor’s evidence on reliance “proceeded on the basis that Kebab Express, Thai Me Down and Mass Nutrition were ‘at risk’ tenants”.

368    It is true that Elanor contended that all nine Food Court Tenants were “at risk”. However, Mr McNaughton’s evidence dealt individually with each of the Food Court Tenants – see: McNaughton 1 at [223] to [237]. It is also true that, having dealt with each individually, Mr McNaughton gave evidence as to what he would have done if had excluded all nine: McNaughton 1 at [238] to [246]. This direct evidence is of some weight in assessing what Mr McNaughton would have done, including as to what he would have done if the number was less than nine. It was not necessary to address by direct evidence every possible permutation of what Mr McNaughton would have done in the event one or more of the nine Food Court Tenants was ultimately found not to have been “at risk”.

369    The task for the court is to assess, by reference to all of the evidence including Mr McNaughton’s direct evidence, what Mr McNaughton would have done. It should be inferred from the objective circumstances, and the direct evidence which Mr McNaughton gave, that he would have treated the six Food Court Tenants identified earlier as “at risk”.

370    Ground 2 of the notices of contention should be dismissed.

Ground 3 of the respondents’ notices of contention

371    Ground 3 of the respondents’ notices of contention is that Elanor failed to prove misleading conduct because, on the trial judge’s finding at J[260] that Mr McNaughton would still have recommended the purchase to the board if he had known that the three Food Court Tenants found by the trial judge to have been in arrears as at 31 July 2017 were in arrears, there was no member of the board called to say that the board would not have approved the purchase.

372    This issue does not arise because Mr McNaughton would have treated six of the Food Court Tenants as being in arrears and this would have resulted in an offer which Alceon would not have accepted if it were put. It is unlikely that Mr McNaughton would have put a recommendation to the board to purchase the Centre.

373    Ground 3 of the noticed of contention should be dismissed.

Conclusion

374    Assuming that the real value of the Centre was less than what Elanor paid, Elanor has established that it sustained damage because of the respondents’ conduct.

THE EXPERT VALUATION EVIDENCE

Introduction

375    As noted, the case was ultimately conducted on the basis that Elanor’s loss was the difference between what was paid and the real or true value of the Centre as at 1 November 2017. The phrase “true value” and “real value” was used by Dixon J in Potts v Miller [1940] HCA 43; 64 CLR 282 at 299; see also Gould v Vaggelas [1985] HCA 75; 157 CLR 215 at 255 (Brennan J). The phrases are interchangeable – see, for example: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; 217 CLR 640 at [36]. The “real value” concept is used to distinguish the value being spoken about from the “market value” of the asset.

376    Expert opinion evidence was given by Mr Kwan for Elanor and Mr Goran for Alceon in relation to the market value of the Centre.

377    As mentioned, Mr Kwan was a partner and Head of Valuation and Advisory at KFVAQ. He commenced his career as an assistant valuer in Brisbane in 1993: AB126. His unchallenged evidence was that he performed “approximately over 100 … retail centre valuations in Queensland each year” and that he had been preparing such valuations for over 25 years: Kwan 2 at [6]. Mr Kwan was not an independent expert witness in the sense that phrase is usually employed in the litigation context, because he had assisted Elanor in relation to the valuation of the Centre when Elanor purchased the property. He gave a valuation in 2017. He had also been retained by Elanor before providing that valuation: AB1519.

378    Mr Goran was a senior valuer at Field & Kaye: Goran at [1]. He was first registered as a valuer in Queensland on 9 June 2023, shortly before the hearing of the trial: AB3668.27. His evidence was to the effect that he had nevertheless valued properties in Queensland giving as examples a KFC, several centres in Cairns, a cinema in Mackay and various other commercial properties: AB3669.38 – 42. Mr Goran was an independent expert witness.

379    Mr Kwan’s report was based on an assumption that nine of the Food Court Tenant lots were vacant: AB118. On that basis, he considered the market value of the Centre to be $49 million. At trial, the applicant submitted allowance should be made for the rental guarantee of $650,000 such that its loss was $5.6 million ($55.25m - $49m – $650,000): AB121 at [216].

380    Mr Goran did not assume that any of the Food Court Tenant lots were vacant. On that basis, he considered that the market value of the Centre was $58.7 million: AB306. This was based on an amount of $57 million determined by reference to discounted cash flows and an additional amount of $1.7 million “which reflects the additional development potential”: AB335; J[318].

381    In other words, Mr Goran considered that the market value of the Centre exceeded the price in fact paid by arm’s length parties by about $3.45m. It was not suggested – either by Alceon or Mr Goran – that Alceon had some important misunderstanding when entering into the transaction, or that the sale was in some way forced, or that there was any other circumstance which might explain a sale at a significant undervalue. Obviously, Alceon had full information.

382    Despite Mr Goran’s somewhat surprising conclusion, the trial judge preferred Mr Goran’s views. The trial judge accepted “each aspect of the opinions and evidence of Mr Goran on the market value question, before any allowance for redevelopment potential”: J[357]. His Honour also appears to have accepted that an amount of $1.7 million should be added to the $57 million.

383    Apart from an acceptance of Mr Goran’s valuation, no reason was given by the trial judge for the implicit conclusion that a sophisticated vendor, aggressively pursuing its interests in an arm’s length transaction, sold its shopping centre $3.45 million below its market value.

384    The only information deficiency was on the part of Elanor. On the basis of that information deficiency, Alceon secured a sale at $55.25 million in a competitive market process. In the absence of explanation on the part of the vendor, and uninstructed by expert evidence but instructed by logic, it was likely that the market value was, if anything, less than $55.25 million if the true position – that there were in fact a number of “at risk” tenancies – were known to the purchaser.

385    As explained below, the trial judge’s assessment of damage involved error. None of the parties were keen for the issue of damage to be remitted and the question can be fairly addressed on appeal.

Independence, expertise and credibility

386    The trial judge extensively examined the dealings between Mr McNaughton and Mr Kwan in his reasons: J[73] – [74]; [85]; [89] – [91]; and [274] – [314]. His Honour ultimately concluded that “Mr Kwan did not act as one would expect an independent expert witness to act in the preparation of a valuation opinion for the purposes of this proceeding” and that “[r]ather than acting truly independently, Mr Kwan was an active participant in assisting Elanor by provision of, what was to Elanor, an acceptable valuation figure – one that was considerably less than the purchase price that it had paid for the Centre”: J[303].

387    His Honour accepted that it was Mr Kwan’s honestly held view that, in his role as an expert in the proceedings, he was impartial and acted impartially: J[305] and [306]. However, his Honour did not accept that he was “a truly independent and impartial witness in this proceeding”, stating:

[306]    … The effect of his prior involvement with Elanor, his provision of draft opinions to Mr McNaughton prior to his engagement as an independent valuer for the Bank of Queensland and the subsequent provision of the revised opinion for Mr McNaughton, in anticipation of this proceeding, corrodes his independence and impartiality.

388    The trial judge stated at J[307]:

[307]    There are two further relevant matters. Mr Kwan signed a response affidavit on 21 June 2023, specifically to address Mr Goran’s valuation. In it he contrasted his valuation experience in Queensland, with that of Mr Goran. He said: “I am very familiar with persons who also perform valuations in retail centres. In the course of my time performing such valuations, I have never encountered [Mr Goran’s firm] previously providing valuation evidence of retail centres. I have not heard of [the firm] prior to reviewing the… report.” When questioned about this evidence it was put to him that his intent was to “belittle or denigrate” Mr Goran’s firm, to which Mr Kwan responded: “the other side would be doing the same to me.” Unsurprisingly, Mr Kwan’s attention was then directed to that part of the Expert Witness Code of Conduct which provides that an expert witness is not an advocate for a party. Mr Kwan denied that he was attempting to belittle the character of Mr Goran’s firm, but nonetheless accepted that he was hardly paying a compliment to the firm. That statement in my view was unnecessary, was not a matter for Mr Kwan to include as part of his reply evidence and is a further basis for questioning his independence.

389    The trial judge at J[307] was referring to paragraph 6 of Mr Kwan’s second affidavit. This was in the following terms:

[6]    I perform approximately over 100 of retail centre valuations in Queensland each year. I have been preparing such valuations for over 25 years. I refer to my curriculum vitae attached to my Affidavit of 22 December 2022 setting out my experience as a valuer. By reason of my experience, I am very familiar with persons who also perform valuations in retail centres. In the course of my time performing such valuations, I have never encountered FK previously providing valuation evidence of retail centres. I have not heard of FK prior to reviewing the FK Report.

390    He was taken to the final two sentences in cross-examination. The first questions he was asked and the answers given were:

Who drafted this paragraph?---The lawyers.

So you didn’t draft this paragraph?---We had a teleconference to draft the affidavit.

391    Mr Kwan was asked some questions about who he discussed the paragraph with and the cross-examination continued (AB3623.45 – 3625.41):

Now, coming back to paragraph 6, the last two sentences:

I’ve never encountered FK previously providing valuation evidence of retail centres. I have not heard of FK prior to reviewing the FK report.

You see that?---Yes.

Now, you were trying in those sentences to assist Elanor’s cause in these proceedings, weren’t you?---No. I was asked a question by the lawyers for this affidavit of whether I had heard of F&K, and my answer was, “No.”

Yes. But you understood, didn’t you, that the effect of these two sentences is to try to belittle or denigrate FK; isn’t that right?---The other side would be doing the same to me. But - - -

No?---Yes.

No, Mr Kwan?---Yes.

You accept that?---I accept that. Yes.

All right. Those sentences have nothing to do whatsoever, do they, with the proper value of this shopping centre for the court to determine?---They were – that statement was made after review of their valuation report for the centre.

I will go back, if I may, to page 196. This is back to the court – the expert code of conduct; you with me?---Yes.

It says, “An expert witness” – at paragraph 2:

An expert witness is not an advocate for a party and has a paramount duty overriding any duty to the parties to the proceedings or other person retaining expert witness.

Do you see that?---Yes.

…to assist the court in ..... matters relevant to the area of expertise of the witness.

Do you see that?---Yes.

You see it?---Yes.

What part of the two sentences to which I took you in paragraph 6 of your second affidavit fall within that duty?---What part? Could you just say that again.

Do you want to see the paragraph again?---The – where – the F&K statements?

Yes?---Yes. I know – I know that statement. That’s just a statement of fact. I’ve never heard of F&K. But in terms of my duty - - -

I’m sorry. I will pause you there. You said you’ve never heard of F&K?---No.

So you don’t know any – well, do you know anything – did you know anything about them at the time at which you swore your affidavit?---No.

Yet you were prepared to make the observation that you did with a view to trying to belittle the character of F&K in front of the court; is that right?---I don’t think I was belittling them. No.

It was hardly a compliment, was it?---No.

And it had nothing to do, I suggest to you, with assisting the court in attempting to value this property; isn’t that right?---My statement about F&K has nothing to do with my valuation of opinion on the Bluewater ..... valuation. No.

Yes. So if one goes back to the – paragraph 2 of the code of conduct, you accept that you have failed to comply with your paramount duty as described in that paragraph with what you said about F&K in paragraph 6 of your second affidavit?---No. I just said I’ve never heard of F&K, and I’m not – I’m not aware that they’ve done any retail valuations of retail centres in Queensland.

Nonetheless, you saw fit to make the observations you did in paragraph 6 with a view to, I suggest, denigrating them in front of the court; isn’t that right?---Well, I was provided with a valuation report they had prepared on the centre, and that was just a statement of fact.

Well, you didn’t descend into, in paragraph 6, anything to do with the contents of the report, did you?---That came afterwards, didn’t it?

Yes. It was a gratuitous swipe F & K, wasn’t it?---No. It was – I was - - -

You were trying to advocate for Elanor, weren’t you?---No, it was – I was asked the question and I answered it.

You understood, didn’t you, Mr Kwan, that your answer to that question was anything but impartial; you agree?---No, it was a statement of fact.

Included for a nefarious purpose, wasn’t it?---I don’t understand that word, but - - -

392    The trial judge’s view was that the statement made by Mr Kwan (presumably a reference to the last two sentences of paragraph 6 of his second affidavit) was “unnecessary” and “was not a matter for Mr Kwan to include as part of his reply evidence”. In his Honour’s view, this supplied “a further basis for questioning his independence”. This reasoning is not sound.

393    Mr Kwan was asked a question by Elanor’s lawyers about whether he had encountered F&K before and he answered “no”. Elanor’s lawyers drafted paragraph 6 on the basis of the answer those lawyers had been given.

394    It is wrong, and contrary to practical reality, to approach the matter as if it were a matter only for Mr Kwan to decide what did and what did not ultimately form a part of his evidence. The consideration of what to address in reply evidence proceeds from an identification of the legal and factual issues, a task generally undertaken predominantly by the legal advisers. The question of what was relevant to the issues in the proceedings was not so much for Mr Kwan as it was for Elanor’s advisers. Evidently, Elanor’s advisers considered that Mr Goran’s experience in the Queensland market was relevant. The position adopted by Elanor’s advisers in this respect was entirely rational. Mr Kwan’s evidence in this respect was relevant and potentially important. It was in this context that Mr Kwan’s reply evidence was given.

395    It was Mr Kwan’s experience that a vacancy allowance is always applied to multi-tenanted assets to account for inevitable vacancy periods in Queensland: Kwan 2 at [32] – [35], [68], [69]. Such an allowance had been applied in his 2017 valuation. Mr Goran’s position was that a vacancy allowance should not be applied. His experience in the Queensland market was relevant to an assessment of the competing opinions on this issue.

396    Further, the trial judge noted at J[325] that “Mr Goran opines that if a vacancy allowance is applied, then it should also be applied to the analysis of the comparable sales evidence, which is problematic because the financial figures of a shopping centre are not readily available”. The “financial figures” were, on the other hand, available to Mr Kwan. The respective experience of a valuer in the particular market, and with respect to the particular assets (shopping centres), is obviously capable of affecting the assessment of the reliability of the resulting opinions because one valuer might (and in this case did) have more experience than the other in the relevant market and in relation to the relevant assets. Apart from the obvious better understanding of relevant local market forces, a valuer inevitably accumulates the financial and other data on which local valuations are based, large parts of which are unlikely to be available to those who have not conducted (or otherwise seen) the valuations. Amongst other things, this facilitates better assessment of relevant comparable transactions.

397    There was no sound basis to conclude that it “was not a matter for Mr Kwan to include [the evidence about Mr Goran’s experience] as part of his reply evidence”.

398    The trial judge was also unimpressed with Mr Kwan posing a question to Mr Goran, when joint expert evidence was being given during the trial, as to how he could practise in Queensland if he was not registered in Queensland. The trial judge stated at J[308]:

[308]    The other matter concerns evidence that he gave as part of the joint expert evidence session. Mr Goran did not become a registered valuer in Queensland (he was first registered in NSW) until 9 June 2023. After that was put to Mr Goran by Mr Fernon, Mr Kwan put a question to Mr Goran, which he framed as not being personal but: “how do you practice as a valuer if you’re not registered up here?” Mr Goran gave the answer that he has practised in most States and Territories in Australia and has undertaken work in Queensland for clients based interstate. Mr Henry, in later questions took this up with Mr Kwan. He put to him that the question was indeed personal, to which Mr Kwan answered that it was simply “a question of curiosity”. Very direct questions were then put to Mr Kwan that his curiosity demonstrated his role as an advocate for Elanor. Despite Mr Kwan’s denial, that is the inference that I draw. Mr Kwan well knew of Mr Goran’s qualifications by reason of the fact that they are attached to his CV which forms a component of his expert valuation report. He was perfectly content to engage with Mr Goran at the joint expert conclave and then to prepare and countersign the joint expert report. It is not a matter for Mr Kwan as to whether Mr Goran was or was not registered in Queensland as a valuer as unquestionably, he is a qualified and very experienced one.

399    A part of the context in which Mr Kwan said what he did was the difference in experience between the two experts in the Queensland market. The question Mr Kwan asked was relevant. It was open to conclude that the raising of the question tended towards advocating rather than giving impartial evidence. However, it should be recognised that the evidence was given in the cut and thrust of litigation, more specifically in giving concurrent evidence where one expert might seek to convey why he considers his opinion to be preferable to the opinion of the other. This was the first time Mr Kwan had given evidence in Court. Ultimately, it is a careful examination of the facts, the reasoning underlying the opinions, and the rationality of the views expressed, which is the surer guide to the correct outcome than the manner in which one particular piece of evidence is given or the fact that a witness temporarily lost his cool or slipped into a transient moment of what could be seen as advocacy.

400    In contrasting the comparative independence of Mr Kwan and Mr Goran at J[313] and [314], the trial judge stated that there was “no question of lack of expertise or independence” in relation to Mr Goran. There was certainly no suggestion of lack of independence. Nor, at the level of the admissibility of the evidence, or general expertise in relation to valuing, was there any suggestion of lack of expertise. However, there was a material difference in expertise in the geographical market and in the valuation of the particular type of asset, the importance of which should not be underestimated given the access to confidential financial and other information that is inevitably gained the more one values particular assets and the more one operates in a particular market.

401    When addressing how he should approach Mr Kwan’s evidence, his Honour stated at J[311]:

[311]    … As I have said, Mr Kwan is a well-qualified, experienced, and professional valuer. I do not doubt that he honestly approached the various tasks that he was entrusted with first by Elanor, and then by Elanor’s solicitor. He participated in the joint expert conclave with Mr Goran and produced the joint expert report, which I find to be a most useful distillation of the issues and well-reasoned account of the differences between the valuers. In that report, there are many matters of agreement that are recorded including the valuation methodology, the gross market rental income, the adjusted net income and, importantly, the capitalisation rate. In carefully observing Mr Kwan’s evidence, I detected no evasiveness – in fact he answered questions in a straightforward manner, and repeatedly made admissions as to the extent to which he took into account Mr McNaughton’s views.

402    His Honour concluded that he would “exercise caution before accepting the evidence of Mr Kwan where it differs from Mr Goran”: J[313]. In the result, where they differed, the trial judge preferred Mr Goran’s evidence on each occasion.

403    Ground 5 of the appeal includes that the trial judge erred in “inter alia”:

(a)     finding (at J[292]-J[294]) in finding that Mr Kwan’s was influenced by Mr McNaughton in his analysis of value of the Centre;

(b)     in not accepting or otherwise giving weight to Mr Kwan’s evidence of value by reason of his prior dealings with Mr McNaughton in respect of the Centre;

(c)    finding that Mr Kwan’s independence as an expert was detracted by his prior dealings with Mr McNaughton in respect of the Centre;

(d)     finding (at J[302]) that Mr Kwan did not act as one would expect an independent expert witness to act in the preparation of his valuation opinion;

(e)     finding (at J[309]-J[313]) that Mr Kwan was not a truly independent, arm’s length expert which significantly affected the weight that should be given to his evidence …

404    As mentioned, it is the facts and the reasoning and rationality of the opinions expressed which is the surest guide to the correct outcome. No doubt where an opinion on a particular matter rests on unexaminable matters of experience, then competing views might have to be resolved by reference to credibility or lack of independence. However, even then, it would generally be appropriate to take into account the relative experience of the competing experts in connection with the particular matter about which the opinion is expressed if there are rational reasons to infer that such experience is likely to translate into a more reliable opinion.

405    It is not generally appropriate to resolve a difference between experts by reference to a generalised cautionary approach based on lack of independence, as opposed to assessing the persuasiveness of the opinions in light of the facts and the reasoning upon which the opinion is based.

406    The trial judge was correct to conclude that Mr Kwan was not independent and that his previous involvement and the manner in which he undertook his task may have influenced his opinions. It was, of course, never in dispute that Mr Kwan could not be an independent expert witness (in the sense that expression is used in litigation) given his earlier involvement with Elanor, including in valuing the Centre for the purposes of Elanor’s purchase. He was nevertheless instructed, in substance, to undertake the role of independent witness owing his paramount duty to the Court. As the trial judge noted at J[285], the letter of instruction to Mr Kwan “concludes with an emphasis that ‘your ultimate duty is to the Court to provide an independent report based on your experience’”. The trial judge also rightly observed that no personal criticism should be levelled at Mr Kwan for undertaking the task he was asked to undertake: J[310].

407    This Court is in as good a position as the trial judge to take Mr Kwan’s lack of independence into account in assessing his evidence.

408    As is noted at [417] below, the trial judge implicitly made an adverse credibility finding concerning Mr Kwan. For the reasons given below, this finding ought not to have been made.

The main differences between the experts

409    Mr Kwan and Mr Goran participated in a joint expert conclave before a Registrar of the Court on 28 June 2023 and produced a joint expert report dated 28 June 2023: J[315]. They agreed that a “capitalisation methodology” was appropriate. They agreed that the appropriate capitalisation rate was 7.25%. The joint report was prepared by reference to Kwan’s and Mr Goran’s earlier reports.

Provision for capital expenditure

410    As noted in the joint expert report, if it were hypothesised that nine shops in the food precinct were vacant or “at risk”, then it “would be appropriate to either allow for make-good of vacated premises or any Lessors Works to reconfigure premises”: AB500 at [8]. The experts agreed that “[b]oth are time consuming and expensive undertakings and that some new start-up tenants to the centre may require financial support from the Landlord”. Mr Kwan made an allowance of $750,000 for capital expenditure in this respect.

411    Mr Kwan’s position was stated in the joint expert report in the following way:

A mutual understanding was reached in why KFAVQ provisioned $750,000 of Capital Expenditure (including $250,000 Stabilisation Allowance) in its modelling. It was largely explained that were Bluewater be acknowledged to have a further 9 vacant shops then a capital provision would be appropriate to either allow for make-good of vacated premises or any Lessors Works to reconfigure premises etc. Both are time consuming and expensive undertakings and that some new start-up tenants to the centre may require financial support from the Landlord .

412    Mr Goran’s position was stated in the joint expert report in the following way:

F&K whilst agreeing that there would be capital expenditure required to make good the vacant tenancies however, there are no documents to support $750,000 as being the amount of capital expenditure at the date of valuation. Of note there are bank guarantees and / or bonds in place to subsidise any capital required to make good these areas.

413    The trial judge considered that an adjustment should not be made for the following reasons:

[321]    It will be recalled that Mr Kwan increased the allowance for capital expenditure from nil to $750,000, following receipt of the email from Mr McNaughton on 15 September 2017. In evidence I asked Mr Kwan how he derived his figure. He said that it was a discretionary sum, explaining that a lot of buyers will consider future capital expenditure by way of deduction from a purchase price. When asked to explain why the figure was $750,000, and not $740,000 or even $700,000, Mr Kwan confirmed that he did not have any calculations to support his figure. Later, when pressed by Mr Henry to explain the basis for his figure, he denied that it was a guess, insisted that it was an opinion and when ultimately answering the question: “you made it up, didn’t you?” Simply answered: “well, it’s my opinion, yes”.

[322]    This adjustment is a substantial below the line deduction. Mr Kwan provides no evidence as to how he derived the figure, which is not only a matter which goes to the reliability of his evidence. It is a figure that is built upon Mr McNaughton’s suggested allowance. In contrast, Mr Goran’s evidence is logical and supported by cl 9.2 of the standard form leases, which permits the landlord to apply the bank guarantee “against any obligation or liability of the tenant.” Making good a tenancy following breach by a tenant in order to relet, is an expenditure of that character.

[323]    For the reasons that I have given in my assessment of independence, I do not accept this component of Mr Kwan’s evidence and I accept the evidence of Mr Goran if an allowance of this type is to be made, there should at least be a principled and explained basis for it. I also reject Mr Kwan’s evidence because the basis for the estimate was not explained.

414    As to whether Mr Kwan explained “how he derived his figure” of $750,000, the following should be noted. First, on three occasions, Mr Kwan explained that the capital allowance of $750,000 included a “stabilisation provision” of $250,000. He explained this in his second affidavit where he stated:

[29]    If there were 9 additional vacancies in Bluewater than what was already vacant in the Bluewater as at the time of the 2017 Valuation, that additional space would have to be leased. The configuration of some of those tenancies may have been tailored to those specific tenants. However, this specific configuration may not suit all other prospective tenants and therefore capital (in the form of capital expenditure) would have to be expended to re-configure any such customised premises. This process involves a lot of work such as knocking down walls, and re-routing the plumbing and electricity and other services.

[30]    It is also reasonable to conclude that, should the tenants occupying the imminent vacant space continue to fall deeper into rental arrears and not meet their rental obligations, then it would take the landlord both time, expense and management resources to either work with the tenant to improve their trading (much like an administrator would) or ‘lock the tenant out’ and then deal with the matter legally. This latter course of action would inevitably involve more capital expenses including, but not limited to, making good the premises, the potential need to reconfigure some originally custom designed tenancies and the need to undertake further lessor’s works to enable the vacant premises to be re-let.

[31]    Within the amount I allowed for capital expenditure in the 2022 Report, I included a stabilisation provision in the amount of $250,000. This is a contingency amount Landlords could provide assistance to new tenants with, especially those who are starting up in a shopping centre and require financial assistance due to e.g. trading and cashflow issues. It can also take the form of rent concessions and or further rent free periods. This is the basis for my figure of $250,000 to account for stabilisation, which I consider is a conservative figure in the circumstances where this amount would only account for some of the 9 additional vacancies and not necessarily all of them. For the reasons set out above at 29, 30 and in this paragraph, I increased the capital expenditure amount by $500,000.

415    He explained it again in the joint expert report, in the passage extracted at [411] above. He explained it a third time when giving concurrent evidence at the hearing: AB3678.29 – 3679.2. He explained that: the “stabilisation allowance” related to rental concessions that would be needed to new incoming tenants; if there were fourteen vacancies, nine of which were in a particular precinct, then it would be expected that incentives would need to be given whilst the precinct and new tenants “trade up and stabilise their trade”. Mr Kwan then turned to explaining the remaining $500,000 of capital expenditure. In essence, there were two reasons for his view that capital expenditure should be factored into the market value:

(a)    It was an allowance, which prudent and prospective buyers would factor into their pricing, which covered what would be required over a period of ten years to cover what one would anticipate needing to spend on various matters, including upgrading tiles, malls, air-conditioning, plant and equipment : AB3653.41 – 3654.3. He returned to the topic later, explaining that most buyers would consider it in their deliberations in relation to the purchase of complex retail assets to cover upgrading signage, upgrading toilets, tiles and addressing wear and tear. Mr Kwan observed that this was expenditure which the landlord could not recover from the tenant: “They are basically lessor’s expenditure, and it’s basically to acknowledge that retail centres are very capital and management intensive beasts”: AB3679.4 – 20.

(b)    On the basis that one has “a handful of shops, all in a particular retail category, all notionally in trouble or not paying rent”, then one would need either need to manage them to pay rent (presumably involving expenditure directed at improvements which might translate to an increase in trade for the precinct) or “get them out of their premises, in which case, [one] might be left with some capital obligations”: AB3679.31 – 42.

416    It was inaccurate to describe, as the trial judge did at J[323], Mr Kwan’s evidence as not being “principled” or “explained”. Further, the observation at J[322] that “Mr Kwan provide[d] no evidence as to how he derived the figure” is not correct.

417    The trial judge stated that the fact that Mr Kwan “provide[d] no evidence as to how he derived the figure” was “not only a matter which goes to the reliability of his evidence”. By this, his Honour evidently meant that he considered the lack of evidence went to Mr Kwan’s credibility. This implicit adverse credibility finding is not soundly based. It appears to have affected the trial judge’s assessment of Mr Kwan’s evidence more generally. The adverse credibility finding is unsound for the following reasons.

418    First, Mr Kwan explained his reasoning adequately on three occasions. The reasons given by Mr Kwan were not referred to by the trial judge or apparently considered.

419    Secondly, there was no dispute between the experts that, as a matter of “principle”, an allowance should be made for capital expenditure.

420    Thirdly, there was uncontroversial evidence that prospective purchasers acted in precisely the way identified by Mr Kwan in relation to the relevant asset. Earlier in his reasons, the trial judge accepted that Mr McNaughton in fact subtracted $500,000 from his recommended offer to purchase the Centre on account of his estimate of the expected future capital expenditure, based on 1% of the purchase price. Mr McNaughton’s evidence in this respect was (McNaughton 1 at [28]):

[28]    From this number, I subtracted $500,000 to account for expected future capital expenditure, being approximately 1% of the purchase price. I always include such a deduction to calculate a purchase price so as to allow for future capital expenditure that is likely to be spent. This includes building works and potential contributions to tenant fitouts and lease incentives following lease expiries of sitting tenants in the future.

421    There was no suggestion that the amount calculated by Mr McNaughton was an amount derived with the assistance of a quantity surveyor or any other expert. The making of an estimate of the amount of capital expenditure which might be required for the diverse range of matters which might need to be addressed in the upkeep of a shopping centre was a matter plainly within the knowledge and experience of Mr McNaughton, just as it was within Mr Kwan’s experience.

422    As mentioned, there was no dispute between the experts that capital expenditure should be taken into account. It was appropriate to take it into account for both of the reasons given by Mr Kwan – see: [415] above. Mr Kwan gave evidence that his view on the issue of capital expenditure would not particularly change if it was only five or six additional vacant tenancies rather than nine: AB3681.5. This is partly because the allowance was also for general expenditure.

423    To the extent the capital expenditure provision related to capital expenditure specific to the restaurant precincts, as a matter of commercial reality and contrary to the reasoning of the trial judge at J[322] and [323], it is unlikely that bank guarantees or security bonds would be available. The very premise of the need for this type of capital expenditure is that a number of tenants had failed. It is probable that the bank guarantees or security deposits would be substantially used, or exhausted, in satisfaction of outstanding rent obligations. It is more likely than not that, in such a situation, substantial capital expenditure would be required beyond what might be recovered under bank guarantees or security deposits, assuming in the respondents’ favour that bank guarantees or security deposits can be accessed to make good vacated premises by reason of cl 9.2 of the relevant leases.

424    An assessment of what should be allowed for capital expenditure for the purposes of determining the market value of the Centre, was within the experience of Mr Kwan and a matter about which he could express an opinion. In addition to ordinary capital expenditure which might be required due to the aging of the Centre, the evidence supported the reasonable likelihood of capital expenditure being required for the restaurant precincts – see: McNaughton 1 at [58] and [59], referred to at [363] above. An amount of $500,000 should be allowed in the valuation calculation “below the line” for capital expenditure.

Vacancy allowance

425    In the joint report, Mr Kwan explained that he (or KFVAQ) took the view that a vacancy allowance should be applied with respect to multi-tenant assets: AB500 at [9]; J[324]. Mr Kwan stated in the joint report:

It is considered to accepted market norm by owners, prospective purchasers in their pricing and by most banks as acknowledgement of the risks of tenancy churn and or unforeseen tenant failures.

…

The non application of a vacancy allowance results in a very material difference of value. The vacancy allowance of 3.5% for non-major tenant income adopted by KFVAQ or $132,471 pa loosely equates to 1 larger shop or 2 smaller shops assumed as being permanently vacant. This amount translates to approximately [$1,827,186] of capital value.

The actual vacancy rate of Bluewater at the time of sale with the 5 acknowledged vacant shops was 7.29%. The consideration of an additional 9 notionally vacant shops results in a vacancy rate of 22.61%.

426    Mr Goran (or F&K) stated in the joint report:

F&K believe that vacancy allowances if used should then also be applied when analysing the sales evidence. The difficulty of applying a vacancy allowance to sales evidence is that the financials of a shopping centre comprising a tenancy, outgoings and outgoings recovery schedules is not readily available as they are usually of a confidential nature. It is therefore of F&K’s opinion that as a vacancy allowance cannot in the majority of cases be applied to the sales evidence, then it should be disregarded in the financial model of the subject property.

Vacancies within the building and/or imminent vacancies as at the date of the valuation are dealt with by deducting from the capitalised value a letting up allowance comprising a lead time to secure a new tenant, agents leasing fees and an incentive by way of a fit out or rent-free period.

In F&K’s opinion when a letting up allowance has been made within the financials of those vacant or imminent vacant tenancies, to also apply a vacancy allowance would be a case of “double dipping”.

427    After summarising Mr Goran’s position at J[325], the trial judge continued:

[325]    … On Mr Goran’s calculations, his letting up allowance (assuming nine vacancies) is $386,800, calculated over a period of 18 months, plus agents’ fees of $46,416 and a four month incentive of $171,911: in total a deduction of $605,127 which contrasts markedly with Mr Kwan’s capitalised deduction of approximately $1.8 million.

428    When Mr Kwan had valued the Centre in 2017 for the Bank of Queensland, he had used a “vacancy allowance” of 3%. He explained in his second affidavit that, in his experience (in Queensland) a vacancy allowance should always be made in relation to a “multi-tenanted asset”: Kwan 2 at [32]. This was “to account for inevitable vacancy periods of tenancies in shopping centres whether anticipated or not”. He continued at [33] to [35]:

[33]    The only instance where I would not allow a vacancy factor in a valuation may be in circumstances where there is a single tenanted asset, such as a Bunnings or an Officeworks or a Hotel Tavern that are on long-term leases.

[34]    In a shopping centre, where there may be 30 or 40 tenants or more, there is always the potential for tenancy failure. In that case, every time a tenancy does fail, the landlord then requires time, effort, resources and expenses to relet those premises. In my experience, when a tenancy fails the tenants do not always have the funds to make good the premises and sometimes this cost is also placed onto the Landlord even if it is written into the lease that make-good is the responsibility of the tenant. When this occurs, the landlord is required to enter and clean out the premises, and present the empty store to a new tenant. Such a process takes time (letting up period), as it includes finding a new suitable tenant, conducting negotiations with that tenant, the drawing up of leases, the tenant fitting out the premises before occupying them and commencing trade.

[35]    This is the reasoning for applying a vacancy allowance. The calculation of the vacancy allowance is otherwise a discretionary contingency. It can be based on what the current occupancy of a centre is, or what the history of vacancy has been. I increased the vacancy allowance in paragraph 16(e) in the 2022 Report to 3.5% of non-major gross income, up from the 3% I had allowed for in the 2017 Valuation, because the 2022 Report was based on there being 9 additional vacancies at Bluewater. There were therefore more vacancies and additional amounts for vacancy allowance required. I do not consider the vacancy allowance I made in either the 2017 Valuation or the 2022 Report to be a generous amount. I consider that in reality, the allowance is not a significant amount and it may be used very quickly if multiple shops concurrently become vacant and physically leave the centre.

429    At [68], Mr Kwan stated:

[68]    [I]t is accepted valuation practice that a vacancy allowance of some degree be applied to the valuation of multi-tenanted assets to account for either tenancy churn and/ or any unforeseen tenancy failures which result in associated costs to then re-let vacant shops. This is still applied in circumstances even where there is a rental guarantee provided as the rental guarantee does not last in perpetuity …

430    The “vacancy allowance” is applied “above the line”. This is because the Centre will always have unanticipated vacancies. The increase from 3% (in the 2017 valuation) to 3.5% (in the 2022 valuation) was made by reason of the assumption that, in addition to the five actual vacancies, there were an additional nine tenants “at risk”.

431    In addition to a “vacancy allowance”, Mr Kwan made various “below the line” adjustments to take into account expenditure which would be incurred on the hypothesis that there were nine vacancies in the restaurant precinct. This was referred to in the evidence as the “letting up allowance”. Mr Kwan stated in his second affidavit that this expenditure was “additional to the vacancy allowance”: Kwan 2 at [39]. As will be discussed below, the letting up allowance requires consideration (amongst other matters) of how long it is likely to take to fill the particular vacancies.

432    The “above the line” vacancy allowance and the “below the line” letting-up allowance were directed to different matters. Amongst the explanations given by Mr Kwan was the following evidence given during the concurrent evidence (AB3671.8 – 3671.16):

[T]he vacancy allowance that we adopt or apply is in relation to the entire speciality tenants, both existing and/or vacant. And that applies a very general provision which acknowledges that the centre – or, a centre will not be fully leased perpetually. The letting-up deductions that we apply below the line are a little bit more specific. They relate to expiries over the – a coming period, whether it’s 12 months or 24 months, sometimes it could be more. And that acknowledges that depending on the nature of the centre, how many vacancies you may have, the market conditions, that invariably even some of your existing tenancies, when they come up for lease expiry may choose to vacate.

433    As the trial judge observed at J[327], Mr Kwan accepted in cross-examination that there was, in part, an “overlap” involved in the “above the line” vacancy allowance and the “below the line” allowances made specifically for the additional nine “at risk” tenants. This is because the nine tenancies are necessarily included in the generalised vacancy allowance assessed by reference to all tenancies. The fact that there was some overlap was not a sound basis for excluding the “vacancy allowance” altogether. Any overlap would have been amply catered for by reducing the “vacancy allowance” to 3%, as it had been in the 2017 valuation.

434    Mr Kwan had greater experience in the relevant market with respect to the relevant type of assets. His evidence that a vacancy allowance was always applied for this type of asset was inherently plausible as was the underlying reasoning for why it was included. The trial judge’s rejection of the vacancy allowance was explained at J[330], by reference to Mr Goran’s evidence, as being “that one should not assume that vacancies at the Centre will occur in perpetuity and should in consequence be reflected by a capitalised discount before deriving the adjusted net annual or core income”. However, this is precisely what the vacancy allowance represents: the likelihood that for the life of the Centre there will always be unanticipated vacancies which should be taken into account in the relevant cash flows. There was no persuasive reason given by Mr Goran or the trial judge as to why it was more likely than not that the Centre would always be fully tenanted.

435    It is appropriate to allow a 3% vacancy allowance “above the line”.

Reversion allowance

436    Mr Goran added an amount of $1,403,748 to his valuation, below the line, to as a “reversion allowance”. This was an amount to reflect the prospective higher return from leases, when rent is reviewed and adjusted over a period of 11 months from the valuation date.

437    The trial judge explained at J[331]:

[331]    … Mr Goran added an amount of $1,403,748, the explanation for which is set out in detailed calculations in a schedule to his valuation report by reference to each tenancy, the current rent and the estimated future rent by application of the rental adjustment provisions in each lease. The total for all 49 tenancies is the reversion amount, calculated as the present value of these amounts. Mr Goran explained in the joint report that an allowance of this nature, in his more than 30 years of experience, “is an industry accepted method used for single and multi-tenanted properties for all asset classes”.

438    Mr Kwan disagreed. As the trial judge recorded at J[332]:

[332]    Mr Kwan disagrees. In his view the likelihood of future rental reviews is implicitly reflected in the adopted capitalisation rate, and he is not aware in his experience of any prospective purchaser: “who would explicitly price future rent reviews in a shopping centre in this manner. Effectively, a purchaser would be paying for the property’s future income in their current pricing and giving away 12 months rental income growth.”

439    Mr Kwan accepted that the gross market rental income figure of $4,929,872 and is taken as at a fixed point in time and does not take account of increases in gross rent consequential upon rental reviews: J[333].

440    The trial judge referred to aspects of the evidence given by Mr Kwan and Mr Goran at J[334] and [335]:

[334]    … Mr Henry … put to Mr Kwan a hypothetical as to whether he would ignore, for example, if Woolworths was due to have a rent increase “next week”. Mr Kwan said that he would not ignore a rental increase of that character, because the buyer would be “likely to receive” that income at the time of settlement of the property. Mr Kwan was then questioned as to whether he would ignore likely rental increases for 10 tenancies due within a period of three months of the settlement date. Mr Kwan answered that he would “not necessarily” ignore that likely increase in income.