MICHAEL HENRY PAINTER AND & ANOR v HOLMDEN HORROCKS [2002] NZCA 103 (16 May 2002)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca 266/01

	between	MICHAEL HENRY PAINTER AND NICOLA LOUISE PAINTER
		Appellants

	and	HOLMDEN HORROCKS
		Respondent

Hearing:	7 March 2002
Coram:	Gault J Tipping J Anderson J
Appearances:	P J Dale and T J Bowler for Appellants G C Everard for Respondent
Judgment:	16 May 2002

judgment of the court delivered by ANDERSON J

The issue

[1] Mr and Mrs Painter appeal from a judgment of the High Court which held that Mr Somervell, a partner in the respondent law firm, was negligent in advising them on aspects of the purchase of a property. The Painters had claimed $459,922 together with interest and $50,000 for distress and worry. The High Court awarded them $174,000 for pecuniary loss and $5,000 each for distress. They appeal as to quantum.The respondents cross-appeal on two grounds. The first relates to the causative link between the negligence and the loss; the second concerns the effect on damages of a gain arising from the purchase of another property.

The facts

[2] Mr and Mrs Painter, who lived in the Auckland area, decided to sell their family home at Waipuia Place in 1996. On 30 September 1996, Mr Painter signed an unconditional agreement to purchase land at Greenhithe for $550,000.00 with settlement on 28 February 1997. He paid a deposit of $10,000 from borrowed money.

[3] By early February 1997 the appellants had not sold the Waipuia Place property and had not made other arrangements to finance the purchase at Greenhithe. They were then contacted by a Ms Cameron about taking a leasehold property in Patteson Avenue, Mission Bay as a partial trade towards their house. That property is one of three units erected on one section. The nature of the title is a one-third share in a headlease together with a sublease of the particular unit. It is, in short, a cross-leased property derived, unusually, from a headlease rather than from a fee simple. The proprietor of the fee simple of the sections and the head lessor is Sterling Nominees Limited, a company owned and controlled by Mr Michael Friedlander, who is a well-known Auckland businessman.

[4] The head lease had a term of 21 years from 1 February 1978 and thereafter a perpetual right of renewal for terms of 21 years. It provided that if the lease was not renewed or was determined, all buildings and improvements on the land would absolutely revert to the landlord free from any payment or compensation (clause 9); and that upon renewal the rent was to be the greater of an amount calculated on a Consumer Price Index (CPI) adjustment, or an amount "equal to ten percentum of the value of the said land and buildings (if any) existing at the creation of the original lease..." (clause 13). The three yearly rent review during the initial 21 year term were on the basis of the greater of the rent adjusted by reference to the CPI or 10% of the unimproved value of the land. Clause 22 provided that "where two or more Lessees are parties hereto, the covenants and agreements on their part herein expressed or implied shall bind them jointly and each of them severally".

[5] Ms Cameron agreed to buy the Waipuia property for $335,000, and the Painters agreed to buy the Patteson Avenue property for $205,000.Mr Painter, who was very experienced in property transactions, himself prepared agreements for the sale and purchase of the respective properties on standard Real Estate Institute forms.That relating to the Patteson Avenue property included special conditions as follows:

15.2 Subject to solicitors approval by both parties by 4 pm Wednesday 12.02.97.

15.3 Subject to solicitors approval of ground lease by 4 pm Wednesday 12.02.97.

[6] Mr Painter instructed Mr Somervell, a partner in the respondent firm. He handed him the agreements he had prepared and other relevant documents, including the lease. Mr Painter told Mr Somervell that the property would be sold immediately, as further capital was needed to complete the subdivision of the property at Greenhithe. It was Mr Painter's evidence that a few days later Mr Somervell told him that Mr Friedlander was a tough but fair person yet he did not give Mr Painter any advice about the terms of the lease. He stated that if Mr Somervell had warned him or his wife of the possible implications of the lease, they would not have purchased the property.

[7] Mr Somervell testified that he told Mr Painter that Mr Friedlander was tough, and so were his leases. They discussed the terms of the lease but Mr Somervell accepted that he did not say anything about the impact of clause 13 on the rent review, nor give advice about the formula for the rent increase.

[8] The trial Judge, Paterson J, found that Mr Somervell did not advise his client as to the onerous provisions of the lease, telling him only that it was tough; he did not advise Mr Painter that the terms of the lease might make it difficult to resell the property.

[9] The transactions proceeded to settlement.The funds obtained from Mr Cameron by way of equality of exchange were partly used to finance the Greenhithe settlement on the same day.A loan secured by the Painter's over the Waipuia property was partly repaid and partly used to finance the purchase in Patteson Avenue.The Painters later subdivided the Greenhithe property for a profit of $141,000 in addition to the value of a section which they retained. On one valuation that section was worth more than $200,000.

[10] When the appellants took possession of the Patteson property the rent under the head lease was $16,362. The appellants were jointly and severally liable but, in practice, the sub-lessees each paid a third, that is $5,454. When the head lease was renewed on 1 February 1999 the rent was calculated in accordance with clause 13, at 10% of the value of the land and buildings. An arbitration fixed it at $47,000. The sub-lessees challenged the arbitrator's award in the High Court, although the appellants withdrew from the proceedings before trial. The challenge was unsuccessful and the appellants became jointly and severally liable for a rent under the head lease of $47,000. One third of this is $15,666.66.

[11] On 13 July 2001 by summary judgment, the District Court gave possession of the three units to Sterling which then issued bankruptcy proceedings against all sub-lessees. Those proceedings were stayed when the appellants gave security for the total amount owing, which, at the time of the High Court judgment, exceeded $180,000.

The High Court judgment

[12] Relying both on tort and the contract of retainer, the appellants alleged that Mr Somervell was negligent in failing to advise them in the following respects:

(a) That the lessor had the right substantially to increase the ground rent at the next rent review;

(b) Of the effect of clause 13 in respect of the more onerous basis of rent assessment;

(c) Of their joint and several liability for the whole ground rent for a term of 21 years, and continuing even if they re-sold;

(d) Of the reversion of all improvements to the lessor if the lease were not reviewed;

(e) Of their obligation to maintain improvements with no exemptions for contingencies or fair wear and tear.

[13] The respondents did not deny that Mr Somervell owed a duty of care to the appellants. They argued however that in the circumstances of this case the omitted advice was not required, given the limited scope of the retainer.

[14] Paterson J held that the scope of the retainer was not limited in the way contended for by the respondent firm and that while Mr Painter may not have required a detailed review of all the terms of the lease, he wanted to be advised of its essential features. He concluded that there was an obligation on Mr Somervell to advise Mr and Mrs Painter of any unusual and onerous terms in the lease which were likely to impede a quick sale of the property. The Painters' declared intention to sell quickly increased, rather than decreased, the obligation to advise on provisions which might make it difficult to achieve a quick sale.

[15] The Judge also held that Mr Somervell should have been aware of and advised Mr and Mrs Painter that the rent review in 1999 would be on a different basis from the previous reviews and would include a factor which had the potential substantially to increase the ground rental. He negligently failed in this respect.

[16] The Judge considered the advice which should have been given by Mr Somervell. First, Mr and Mrs Painter should have been advised that the rent on renewal could be fixed as a percentage of the value of the land and improvements, rather than simply a percentage of the unimproved value of the land, as had previously been the case; second, that this was likely to lead to a higher rental than usually charged on a perpetual lease from public leasing bodies in Auckland. They should also have been advised that they were jointly and severally liable for payment of rent under the lease; that the cumulative effect of these provisions might seriously impinge on the market price of the property; and that they would be wise to obtain valuation advice on that market value.

[17] Two valuers gave evidence in the High Court. Mr Walker, for the respondents, testified that two values were applicable to a property like the one in issue. One value assumes an unsophisticated purchaser in the marketplace; the other was premised on the concept of a prudent purchaser. An unsophisticated purchaser was said to be one who does not go into the purchase in a great deal of detail, a purchaser who comes along and falls in love with the property. According to a traditional lessee's interest calculation approach, the appropriate market value of the property was approximately $15,500. On a sales comparison approach, which reflects what tends in fact to be paid rather than what a prudent purchaser would be minded to pay, the valuation was approximately $100,000. Mr Taylor, for the appellants, gave evidence that in March 1997, the value of the property to an informed and prudent purchaser was either $17,000 or $15,000 and the value of the property to an unsophisticated purchaser would have been around $85,000.

[18] Paterson J concluded, in relation to these figures, that had Mr and Mrs Painter been advised to obtain valuation advice and done so, they would have discovered that they were paying at least $100,000 more than the property was worth and that they would have extreme difficulty in arranging a replacement mortgage.Paterson J was of the opinion that notwithstanding the eagerness of the appellants to proceed with the purchase of the Greenhithe property they would not have done so if they had been appropriately advised of the terms of the lease. The advice would have "triggered a chain of events which would have made it impractical, if not impossible, to complete the purchase."

[19] The question of damages was addressed by Paterson J on the basis that:

In accordance with McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, the damages to be recovered by Mr and Mrs Painter are those which are reasonably to be contemplated or foreseen from the breach ofduty. The issue is whether the particular damage claimed is sufficiently linked to the breach of the particular duty to merit recovery in the circumstances. The test is whether it was not unlikely that the loss would arise from the breach and reasonable foresight or contemplation are important considerations.

[20] The Judge held that:

Mr Painter's evidence was that he "told Mr Somervell that we were going to sell the property immediately." This advice, which was also confirmed by Mr Somervell in his evidence, was a factor in my findings of negligence against Mr Somervell. It should also be a factor, in my view, in considering what was reasonably foreseeable in the circumstances of this case. The damages which were reasonably foreseeable in February 1997 were the loss which Mr and Mr Painter would suffer if they had endeavored to sell the property in March 1997 or shortly thereafter.

[21] The Judge was not satisfied that the appellants had endeavored to sell the property shortly after purchasing it. He found their evidence of attempts to sell unconvincing, and was of the opinion that once the purchase of the property had been completed and it had become apparent that finance for the Greenhithe subdivision would not be required for a further year or so, Mr and Mrs Painter did not place the property on the market. They determined to hold it in the meantime in the hope they would get a capital gain from it.

[22] In view of the valuation evidence, Paterson J was of the opinion that:

It is reasonable therefore to assume that Mr and Mrs Painter could have sold the property within a reasonable period of buying it for a price of $85,000 net to them. If they had actively marketed the property, they then would have found out the true value of it and obtained an appreciation of their financial problems. They could have moved to address them then.

[23] The Judge was of the view that loss arising from a delayed sale was not reasonably foreseeable. He assessed the foreseeable loss as the difference between the purchase price of $205,000 and the net sale price of $85,000 which would have been available to the appellants. That loss was $120,000.

[24] He also considered it foreseeable that the any sale proceeds would have been available to repay indebtedness. A further foreseeable loss was interest on borrowings on the sum of $120,000. The interest rate was set at 12% per annum. A reasonable period of interest, given that the appellants did not endeavor to sell the property as early as planned, was 4 years, concluding on the date of judgment. The interest was therefore calculated to be $56,000. This gave a total of $174,000 damages which were considered to have been reasonably foreseeable in March 1997.

[25] Paterson J was also of the opinion that the solicitor advising the appellants in February 1997 would not have been able reasonably to foresee that there would be continuing liability under the head lease from 1 February 1999, due to the stated intention to sell promptly.Therefore, the losses resulting from the renewal of the lease, or the retention of the property were not foreseeable.Even if they had been considered foreseeable they would have been discounted because the appellants had taken no steps to seek recovery from the other sub-lessees.

[26] The Judge considered that the claim for general damages for distress and worry was not strong. Much of the distress arose from the subsequent dealings with Sterling, the lessor, which, on the findings made, were not reasonably foreseeable. The appellants were awarded general damages of $5,000 each.

[27] Paterson J rejected the submission that profit made on the subdivision of the Greenhithe property should be offset against the damages. He was of the opinion that there was no causal link between the negligence and that profit:

It is possible that the purchase of the Greenhithe property may not have been contemplated if the swap deal had not been entered into. However, this is speculative and I can make no finding that this would have been the case. There was, in my view, no causal link between the negligence and the profit...It is not appropriate to reduce the damages arising from the negligence because of the profit made from the Greenhithe property.

[28] In the result, therefore, Mr and Mrs Painter were awarded the sum of $174,000 for damages caused by Holmden Horrocks and received $5,000 each in general damages.

The appeal

[29] The appellants argued that although Paterson J correctly stated the legal principles to be applied in assessing damages, his reasons thereafter were flawed. It was argued that Paterson J erred in that he substantially narrowed the legal test for foreseeability when he held that :

The damages which were reasonably foreseeable in February 1997 were the loss which Mr and Mrs Painter would suffer if they had endeavored to sell the property in March 1997 or shortly thereafter.

They contended that it was entirely foreseeable that they would not be able to sell the property, although trying; and/or that they might change their minds about selling the property. It was therefore submitted that damages should have been assessed on the basis of the monies that were spent on the purchase, i.e. equity plus borrowings, and the other losses that reasonably and foreseeably followed

[30] It was also argued that Paterson J erred in holding that the appellants' proceeds on a notional resale should be assessed by reference to an unsophisticated purchaser. They could not have been expected to sell the property for $85,000 because in order to sell at this price, the appellants would have to have been aware of the problems with the lease and concealed those from a prospective purchaser. It was further argued that the appellants were not obliged to sell at a substantial loss, or at all.

The cross-appeal

[31] The respondent cross-appealed against two findings of the trial judge. These were that the appellants would not have purchased the Patteson property if they had been properly advised, and that there was no causal link between the profit made on the Greenhithe property and the purchase of the Patteson property.

[32] On the first point it was submitted that the appellants would have purchased the Patteson property regardless of advice on the effect of the rent renewal clause. The respondent argued that at the time of the swap deal, the appellants were close to losing the substantial benefits they expected to gain from the subdivision of the Greenhithe property. This is in view of the fact that there were only a few weeks to go before the Greenhithe settlement, and that the appellants had been turned down by the banks they approached for finance. It was also argued that the three agreements (the swap deal for Patteson and Waipuia, and the Greenhithe purchase) were interdependent and that the evidence at trial did not support a conclusion that the appellants could have settled Greenhithe without completing the swap.

[33] On the second point it was argued that there was no actual loss to the appellants as a result of proceeding with the swap deal. It was submitted that the financial benefits of the deal would have exceeded the detriments by approximately $166,000. The profit was as a result of the profit on the swap deal and on the Greenhithe subdivision.

Appellants' response to the cross-appeal

[34] In response the appellants submitted that the cross-appeal is against findings of fact, that these findings were properly made and are fatal to the cross-appeal.

Reasons for judgment

[35] The judgment appealed from engaged entirely orthodox principles of law. The appeal and cross-appeal must therefore challenge the findings of fact and the Judge's application of principle to them.The parties have difficulties in the former respect because there is plainly an adequate evidential basis for the findings, and in the latter respect because the application of principle in respect of the facts as found was straight forward.

[36] With respect to the careful submissions of counsel for the parties, we think that neither the appeal nor cross-appeal is meritorious.

[37] Whilst it may have been reasonably foreseeable at the time advice was negligently omitted by Mr Somervell that the appellants might have difficulty in selling it could not be reasonably foreseeable that they would not attempt to do what they intended and informed Mr Somervell they intended to do.There was nothing in fact to suggest that the appellants, having met the demands of settlement, would have adopted the entirely new approach of retaining the Patteson Avenue residence as a home with a view to a longer term capital gain.

[38] On the issue of causation the appeal simply fails on the unassailable findings of fact.

[39] That is the position also in respect of the valuation issue.The actual value of the property in about March 1997 was, not unnaturally, what it would probably have fetched if sold at that time.Distinctions between what a so-called unsophisticated purchaser might have paid and the lower sum that a prudent investor might have paid become entirely academic in the light of the evidence showing that the former type of purchaser was actually available in the market.The evidence was that the Patteson Avenue units had been bought and sold in relevantly recent years at prices well above those which a prudent investor in real estate might contemplate.The reason for this is easy to appreciate.People do not necessarily buy their residences, any more than other forms of property bearing on their enjoyment of life, on the sole basis of a sound investment.Values other than money making can inform choices, a feature of human behaviour one is tempted to acknowledge with some relief. Valuation by references to comparative sales is, of course, entirely orthodox. The fact of the matter is that Mr and Mrs Painter could probably have sold the unit, if they had done what they intended to do and said they would, for $85,000 as the Judge held.

[40] The appeal fails.

[41] So too does the cross-appeal.Paterson J recognised that in appropriate circumstances profit may be offset against loss otherwise recoverable as damages.Hussey & Anor v Eels & Anor [1990] 2QB 227 is in point.But as in the case of the damages sought the justification for bringing profit into account is one of causative potency.Whether the negligence which in the legal sense caused the damage also caused the alleged financial benefit is essentially a factual question.

[42] In this case the Judge held that in fact a relevant causal link between the negligent advice of Mr Somervell and the profits on the subdivision was not established.He considered it speculative that the purchase of the Greenhithe property would not have proceeded if the swap had not been undertaken.We see no proper basis for displacing that finding.

[43] But there is another and no less compelling factual basis for rejecting the cross-appeal.This is that there is no evidence to support a view that upon settlement of the Greenhithe transaction the appellants realised a profit. Proof of a profit on settlement would be essential to the respondent's claim that by reason of their solicitor's negligence the Painters were able to take title to a property the purchase of which they could not otherwise have settled.

[44] In reality of course the profit was not made on the purchase but on the development and sale of the subdivision.It must be assumed that the value of the opportunity to develop was inherent in the price the appellants paid. Plainly, therefore, the benefits of actual development were not relevantly linked to the negligent advice.

Result

[45] For these reasons both the appeal and cross-appeal are dismissed.In the circumstances of the case, having regard to the value and sums involved in the respective appeals, no order is made as to costs.

Solicitors

Grove Darlow & Partners, Auckland for Appellant

Phillips Fox, Auckland for Respondent