Weston v Costello [2014] NZHC 113 (11 February 2014)

Last Updated: 4 April 2014

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2012-419-1404 [2014] NZHC 113

BETWEEN PETER WESTON Appellant

AND SUSAN COSTELLO First Respondent

AND WHITIANGA INTERNATIONAL LODGE LIMITED

Second Respondent

AND JOANNA COSTELLO Third Respondent

Hearing: 7 June 2013

Appearances: P F Gorringe for Appellant

S J Chatwin for Respondents

Judgment: 11 February 2014

_{JUDGMENT OF KEANE J}

This judgment was delivered by on 11 February 2014 at 12pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

K Clews, Hamilton

Chatwin Legal Limited, Hamilton

WESTON v COSTELLO [2014] NZHC 113 [11 February 2014]

[1] On 21 June 2010 Peter Weston purchased the business of Whitianga International Lodge Limited in White Street, Whitianga, after reaching agreement with two of its three directors, principally Susan Costello, who managed the business. The other director, her husband, Christopher Costello, is a builder.

[2] WIL’s lodge at 4A White Street, which it then described in its advertising as a

‘warm wooden New Zealand style villa located close to cafes, tourist centre and beach ... not a back packers, not a hotel or motel’, has 12 bedrooms and seven en suite bathrooms and the capacity to accommodate 24 and even 30 guests.

[3] To give effect to the agreement WIL granted Mr Weston on 21 June 2010 a two year lease over the villa with a right of renewal for three years, at a rent of

$20,000. WIL’s third director, Joanna Costello, Mr Costello’s sister, granted to Mr Weston a tenancy over 4B White Street, her one bedroom cottage and sleep-out next door, for a rent of $10,000 each year.

[4] On 1 August 2010 Mr Weston took possession and he met the rent payable for some five months. But on 31 January 2011 he complained to the Costellos that his turnover for the first six months had been half what Mrs Costello had represented to him it would be. In entering the transaction, he then said, he had relied on her assertion that the most recent annual turnover had been $100,000.

[5] Then or later he also made two related complaints. One was that Mrs Costello did not tell him before the transaction that WIL’s land use consent from the Coromandel District Council, dated 2 April 2003, only allowed it to accommodate

12 English language students; a fact inconsistent with WIL’s advertised business. The other was that she did not make it clear to him that her turnover figure included payments from OP Columbia Limited, a local aquaculture company, for housing seasonal workers until 31 July 2009.

[6] In response the Costellos offered, at least twice, to take the business back on terms anticipated in the agreement for sale and purchase and to release Mr Weston from the lease and tenancy. Mr Weston declined. He wanted to retain the benefit of

both lease and tenancy but at a very significantly reduced rent. In March 2011 he brought this present claim seeking $200,000 damages.

[7] On 26 May 2011 WIL gave Mr Weston notice under the Property Law Act

2006 that unless he paid the rent outstanding, and default interest, he would have to vacate. He had ceased paying rent in 2010 but it was not until 26 April 2012, on WIL’s application, that Judge Spiller cancelled the lease and tenancy, and required Mr Weston to vacate within 10 working days, leaving specified assets. He and his family vacated on 10 May 2012.

[8] On 29 August 2012, in a decision reserved after a one day hearing, Judge Spiller dismissed Mr Weston’s misrepresentation claim. He allowed as to $3,363 Mr Weston’s claim to be compensated for assets WIL was obliged to purchase back. He gave judgment for WIL for $33,703: $4,847 then outstanding under the agreement for sale and purchase, $25,792 unpaid rent and $3,063 interest. He gave judgment for Ms Costello for $16,261, $14,783 rent and $1,478 interest.

[9] Mr Weston, who had until then represented himself, appealed, raising a number of issues. According to his counsel, he now pursues only the three grounds that I now set out (his second ground for the first time on this appeal). Mr Weston contends that the Judge erred:

(a) in holding that, before he purchased, any representation Mrs Costello had made to him concerning turnover was in lesser terms that he contended for and was accurate;

(b) in holding that, before he purchased, Mrs Costello did tell him of the land use consent, permitting 12 English language students and did not hold out that WIL had consent to accommodate 30 guests; and that, in any event, he had suffered no loss;

(c) in holding that WIL was only obliged to purchase back the assets he had left behind when he vacated on 12 May 2012 and in valuing those assets, not on a going concern or in use basis, but second hand.

Principles on appeal

[10] This is a general appeal under s 72 of the District Courts Act 1947. It is by way of rehearing, and this Court has a wide power to resolve the appeal in such fashion as it considers just.¹ On a general appeal, as this is, Elias CJ said, in Austin, Nicholls & Co Inc v Stichting Lodestar, the appellant is:²

entitled to judgment in accordance with the opinion of the appellate court, even where that opinion is an assessment of fact and degree and involves a value judgment.

[11] But as the Chief Justice also made clear, even though the appellate court does have a duty to decide the merit of the case for itself, the appellant still carries the onus of satisfying that court that it should differ from the court under appeal.³ The appeal court may not set aside the decision appealed unless it is convinced that it contains a material error.

[12] As the Chief Justice said, moreover, though an appeal court does not owe deference to the court appealed from, that court may enjoy an advantage that it does not enjoy, particularly, as in this case, 'the opportunity to assess the credibility of witnesses where such assessment is important';⁴ and so:⁵

In such a case the appeal court may rightly hesitate to conclude that findings of fact or fact and degree are wrong. It may take the view that it has no basis for rejecting the reasoning of the tribunal appealed from and that its decision should stand.

First ground – turnover representation

[13] In his first ground of appeal Mr Weston challenges the Judge’s central conclusion as to the primary representation Mrs Costello made to Mr Weston and Ms Hayman on the sale of the business. The Judge accepted Mrs Costello’s evidence

_{and rejected that of Mr Weston.}

¹ _{District Courts Act 1947, ss 75, 76.}

² _{Austin, Nicholls & Co Inc v Stichting Lodestar [2007] NZSC 103 at [16].}

³ _{At [4].}

⁴ _{At [5].}

⁵ At [5].

[14] In revisiting that central issue of fact I first set out Mrs Costello’s narrative, and then Mr Weston’s counter-narrative, before coming to the Judge’s own decision and my own assessment whether his conclusion was open to him on the evidence.

Costello narrative

[15] Mrs Costello explained in evidence that, after WIL purchased 4A White

Street in 2003 and renovated and extended it, they took in guests in 2003 – 2004.⁶

She managed the business. Her husband continued as a builder. Between November

2006 - August 2009 they employed a manager, who lived in the cottage. That ceased in August 2009 after the OP Columbia contract ended, and they had to refurbish the villa.

[16] Between September 2009 – May 2010, Mrs Costello and her husband lived in the cottage and she managed the business. But she became pregnant with her second child, who was born in September 2010. They decided against appointing another manager or, conversely, selling. They advertised the business for lease in the Peninsula Post. By 31 May 2010 they had five expressions of interest, one from Mr Weston and his partner Ms Hayman, whom Mrs Costello met that day.

[17] The Costellos were only prepared to lease the business to people able to run it and to care for the buildings and she emphasised to Mr Weston and Ms Hayman that it needed to be managed daily. She also asked how experienced they were. They said they had other businesses and were looking for a complementary business. During the winter months, when demand at the lodge was quiet, for instance, they envisaged offering business conferences.

[18] Mrs Costello explained to Mrs Hayman that WIL’s accountants were preparing the accounts for the year ended 31 March 2010, but that, based on the GST returns she had, the lodge business had a turnover of some $100,000 including GST.

[19] Mrs Costello explained that when they had started the business six years before their focus had been on accommodating English language students and they

⁶ Affidavit dated 23 February 2012.

had obtained resource consent to cater for 12. But, she said, they had accommodated tourists, short term and long term casual guests, travelling sales people and seasonal workers. She spoke of the OP Columbia contract, which had ended in July 2009, after which they refurbished over six weeks. She explained that they no longer accommodated seasonal workers on any scale.

[20] That evening Ms Hayman telephoned Mrs Costello to say that she and Mr Weston were very interested and they agreed to meet the following day. Ms Hayman asked for a schedule showing the rate of occupancy as from September 2009. The following morning, on 1 June 2010, Mrs Costello sent to Ms Hayman by email a schedule between 1 September 2009 – 31 May 2010 showing t he rooms that had been occupied. (If a room had been unoccupied for a month the schedule gave the figure 31, if it had been fully booked, the figure zero.)

[21] That day Mrs Costello, her husband and Ms Hayman and Mr Weston met. Mrs Costello told them WIL’s room rates and gave them a business card setting those out: $85 per night for a double room inside and $120 a night for a double room outside, $40 a night for a single room; and for English language students $190 a week. Mrs Costello also gave them the booking sheets, showing the occupancy rates, summarised in the schedule sent earlier that day.

[22] Mr Weston said that to predict future cash flow he intended to prepare his own spreadsheet. He asked what the costs of the business were. Mrs Costello told him the basic costs but suggested he wait for the financial accounts then being completed. Ms Hayman, she recalls, said in Mr Weston’s presence ‘we are not interested really in what its done we are more interested in what we can do with it’.

[23] Later that afternoon Ms Hayman sent to Mrs Costello a proposal by email. WIL’s solicitors prepared the agreement for sale and purchase for the business, the lease for the villa and the tenancy agreement for the cottage. Their advice was that it was better to sell the business on terms enabling WIL to buy it back, than to lease it.

[24] The purchase price for the business was $10,388 plus GST, which included

$7,388 for listed chattels at book value. The balance, $3,000, was for ‘intangible assets’ –the business advertising WIL had already placed and paid for.

Weston counter-narrative

[25] Mr Weston said in evidence that after seeing the advertisement in the Peninsular Post he and Ms Hayman met Mrs Costello at the lodge, which she then described to them as being for international students and tourists.⁷ Mr Weston asked her why the business was on the market. She said that she was about to have a child.

[26] In the kitchen, Mr Weston noticed a circular burn mark in the linoleum. He asked how that had come about. Mrs Costello said that an OP Columbia employee had put a hot plate on the floor. She explained that the lodge had been leased recently to OP Columbia and that its seasonal workers had wrecked the lodge. WIL had been obliged to refurbish completely. Since then WIL had only taking in students and tourists.

[27] Mr Weston noted that there was then only one guest and one international student. He asked whether there were more. Mrs Costello said that the lodge was quiet in winter but that between October – March turnover reached $100,000. Over the Christmas period, she said, they did not take in students. Tourists paid in one night what students paid in a week.

[28] Mr Weston asked if Ms Costello had accounts and GST returns. She said that WIL’s accountant had both, but was away. Mr Weston said he had run a hotel for seven years. He wanted to see the books and accounting system. Mrs Costello told him she used a manual booking system. She showed him her booking sheets distinguishing between international students and tourists. He asked her to set them out in a spreadsheet.

[29] Mr Weston said he wanted to set expenses against turnover. He asked what the expenses for the past year were. Ms Costello told him that power was $1,800,

⁷ in a number of affidavits including one in May 2011.

gas $2,000, telephone $200 monthly and insurance $2,500. They discussed other expenses like rates, repairs and maintenance and consumables. He asked her what the rent was to be. She said that it was $20,000 for the lodge and $10,000 for the house, plus GST.

[30] On 1 June 2010 Mr Weston received Mrs Costello’s spread sheet analysis. It did not set out any monetary amounts. He asked her whether it represented a turnover for the 2009 – 2010 season of $100,000. She agreed that it did. He made his own analysis and found that even with that turnover he would suffer losses in the first five months unless the rent was variable. On 1 June 2010 that was agreed.

[31] Relying on these representations, Mr Weston says, he put his proposal to Mr and Ms Costello that day to purchase the business. His wife and Mrs Costello dealt with the details in a series of later telephone calls. On 21 June 2010 the agreement was entered into and possession given on 1 August 2010.

[32] By 31 January 2011, Mr Weston said, his turnover was half that represented and that he could not pay the rent agreed. He sent Mrs Costello an email to that effect. On 7 February 2011 the Costellos’ solicitor replied denying that Mrs Costello had ever given him the assurance as to turnover he contended for. They sent to him the GST returns for the 2009 – 2010 financial year showing total transactions to be

$97,160.

[33] Mr Weston found these returns unconvincing. They were not for the summer tourist season, September 2009 – April 2010, as set out in the booking sheets and spreadsheet. They included the OP Columbia payments for April – July 2009, normally the Lodge’s quiet period, $34,325. Without them WIL’s turnover became

$60,000, $40,000 less than that represented; a turnover coinciding with his own for the first six months.

[34] Consequently, Mr Weston then contended, the rent agreed, $33,500 including GST, ought from the outset to have been set at half that amount. When WIL issued the 27 May 2011 notices cancelling the lease and tenancy if the rent was not paid, he sought an interlocutory injunction to prevent eviction.

Judge’s decision

[35] In his reserved decision Judge Spiller held that Mr Weston had not proved, to the balance of probabilities, as he was obliged to do, the turnover misrepresentation he asserted.

[36] The Judge accepted Ms Costello’s evidence that all she had said to Mr Weston was that turnover was of the order of $100,000 including GST for the year ending 31 March 2010, but that the accounts had still to be completed; and that this turnover had been derived from English language students, tourists, short and long term casual guests, travelling sales people, and until July 2009 the OP Columbia seasonal workers.

[37] Mr Weston and his partner had agreed, the Judge noted, that they had known about the OP Columbia workers and the damage they caused; and he had three other reasons for rejecting Mr Weston’s evidence, the first of which was that Mrs Costello was unlikely in May - June 2010, to stated what the turnover would be by July 2010. She was more likely to have stated what it had been as at 31 March 2010.

[38] Secondly, the Judge could not see what Mrs Costello had to gain by overstating turnover. The transaction favoured Mr Weston. He got the tangible assets at book value, an under value. WIL had to buy back the assets at the end of the lease. The payment for intangibles reimbursed WIL for advertising already paid. Mr Weston paid nothing for goodwill. The total rent, $30,000, could readily have been obtained by renting out the villa and cottage simply as houses.

[39] Thirdly, the Judge found circumstantially, Ms Costello’s account was more

credible. When Mr Weston first alleged a misrepresentation as to turnover on 31

January 2011, he was already behind in rent and the Costellos had twice agreed to terminate but each time he had declined. As the Judge said:

... he then continued to live in the properties ... along with his family members, paying no rent, earning income from the properties and complaining of losses, until ordered by the Court to vacate the properties.

Challenges on appeal

[40] Mr Weston first contends that the Judge failed to recognise that a $30,000 rent required a $100,000 turnover; a rent no greater than one-third of turnover. Or that, without the OP Columbia increment, WIL’s turnover for the year ended 31

March 2010 reduced to $52,541; a turnover coinciding with his own in the next year,

$61,094, and WIL’s own six year average income, $57,157. His rent ought to have been half that agreed.

[41] Secondly, he contends, Ms Costello’s turnover representation, even on her own evidence, was misleading because she did not distinguish between turnover including and excluding the OP Columbia payments, a one third difference; and, given that the OP Columbia contract had ended in July 2009, he needed to know the turnover for the business without it.

[42] It was also possible, he contends, that even if, as the Judge held, Ms Costello did tell Ms Hayman, that based on the GST returns for the last financial year, 1 April

2009 – 31 March 2010, the business had a turnover of about $100,000 including GST, she may have talked about the OP Columbia contract another time. Ms Hayman, and he, would not then have understood that the turnover did include the OP Columbia increment.

[43] Finally, Mr Weston contends, if anything, Mrs Costello on her own evidence further overstated WIL’s turnover, when she said that the lodge had been vacant for six weeks. That necessarily implied that, if it had been occupied for those six weeks, turnover would have been higher.

Conclusions

[44] I am satisfied that the Judge was entitled to prefer Mrs Costello’s evidence and for the reasons he gave, which I consider cogent. I need only make the following points of emphasis.

[45] Mrs Costello’s evidence that she said at the first meeting that turnover was about $100,000 based on the GST returns for the preceding financial year is plainly

the most plausible probability, and is consistent with the returns the solicitors sent to Mr Weston later. Furthermore, her 1 June 2010 spreadsheet showing the actual rate of occupancy from 1 September 2009, and included the rates charged. Mrs Costello gave Mr Weston all that he needed to make an informed choice.

[46] That aside, Mr Weston, on his own evidence, had to have been aware that the turnover figure included the OP Columbia increment. He, himself, said that after he asked about the damage to the kitchen linoleum, Mrs Costello told him about the OP Columbia agreement and how it had ended. In his letter, dated 15 February 2011, as the Judge said, he again confirmed that he was aware of that agreement.

[47] It has also to be significant that Mr Weston, who on his own account is highly experienced in this form of business, did not seek a turnover warranty or financial accounts. That may well have been, as the Judge said, because he was not overly concerned. He was paying nothing for goodwill. He was obtaining the assets for an under value, and paying a residential rent.

[48] Equally tellingly, Mr Weston could have accepted the Costellos’ offer, after six months, to take back the business. Instead he held on to it and pressed for a lower rent. He continued the business for almost 18 months without paying any rent.

Second ground – land use consent capacity

[49] Mr Weston next challenges, and for the first time on this appeal, the Judge’s related conclusions that Mrs Costello told him before purchase that WIL had a land use consent permitting it to accommodate 12 English language students only; and did not, as he contended, hold out that WIL had a resource consent for a 30 guest tourist lodge.

[50] Mr Weston does not, I understand, challenge as such the Judge’s conclusion that disclosure was not required under cl 6.1 of the agreement for sale and purchase, which states:

The vendor warrants and undertakes that at the date of this agreement the vendor has not received any notice or demand and has no knowledge of any requisition or outstanding requirement from any local government authority

or other statutory body which adversely affects the business or the premises and which has not been disclosed in writing to the purchaser.

[51] The Judge held that this duty only comes into play when a vendor has

‘actually received some notice or demand from some local body which has not been complied with’, and that WIL had not received any such notice. But, Mr Weston contends, the Judge did find effectively, without recognising it, that the business he purchased could only be conducted profitably, indeed without loss, in breach of the land consent. The students only paid $10,000 - $15,000 a year. To meet the $30,000 rent and to make a profit, the full capacity of the lodge had to be used.

[52] The Judge failed also, Mr Weston contends, to recognise that after he learned of the land use consent he did attempt to obtain a wider consent, and while WIL itself did make an application, he was not allowed to join it. That is why in February

2011 he applied for an injunction requiring WIL to act with urgency. In the event that application came too late and the new consent only permitted 18 guests.

[53] Finally, Mr Weston does accept, consistent with his own evidence, that he may have traded until December 2010 unaware of the land use consent constraint. But that does not mean, he contends, that as the Judge held, he then suffered no loss. He lost the ability to obtain future profits.

Conclusions

[54] I have reviewed this second ground of appeal with the others even though it was not foreshadowed in Mr Weston’s notice of appeal, but here too, I conclude, the Judge was entitled to prefer Mrs Costello’s evidence and for the reasons he gave, which I consider cogent. I need only make the following points of emphasis.

[55] The issue for the Judge was not just whether Mrs Costello did disclose to Mr Weston, as she said she did, that WIL had a land use consent for 12 language students. The issue was whether, as Mr Weston contended, she held out that WIL had consent for 30 guests, and that is a vastly different proposition.

[56] The only aspect of the evidence that supported that latter proposition potentially was that the villa did have the capacity to accommodate 24 or even 30 guests. But the occupancy schedule showed that the villa had only ever had in excess of 18 guests on one or two days in the year and here too, the Judge was entitled to take into account two factors material to his conclusion as to turnover.

[57] Mrs Costello had nothing to gain by misrepresenting the land use consent. WIL was not selling outright at a profit. It was to take the business back after two years, at most five years. Its interest coincided with that of Mr Weston – to see the business trade profitably in the meantime. As against that, Mr Weston could so easily have required WIL to warrant its right to accommodate 30 guests, or to have made that a condition. That he did not suggests that it was not material.

[58] Finally, the Judge was entitled to find that Mr Weston suffered no loss. Until December 2010, on his own account, he traded unaware of the land use ceiling. After December 2010, while Mr Weston traded until 10 May 2012, he did so without paying any rent. He never had any sustainable claim for loss of future profits.

Third ground – repurchased assets valuation

[59] Mr Weston’s final ground of appeal challenges the order the Judge made requiring WIL to pay to Mr Weston $3,363 on account of the assets it became obliged to repurchase under the order to vacate on 26 April 2012. He contends that the Judge significantly understated those assets and wrongly held that they were to be valued at second hand and not as for a going concern or for assets in use. He contends still for damages of $50,000.

[60] As to this ground of appeal, in contrast to the other two, the agreement for sale and purchase was not silent. Clause 1.5 imposed on WIL, at the end of the lease, the obligation to:

... buy back the furniture and booking systems and software at the amount of valuation at the expiration of the term with provision for valuation of the amount agreed.

So too, under cl 47 of the lease, WIL had to:

... buy back the chattels and intangible assets by agreement between the parties and failing agreement by arbitration as set out in clause 44 of the lease.

[61] But, as the Judge said what assets had to be repurchased and at what value had not been taken to arbitration. Mr Weston had elected to pursue his claim for damages in the District Court. And that apart, what chattels WIL had to purchase back, the Judge was entitled to hold, was settled when he made the order on 26 April

2012 requiring Mr Weston to vacate.

[62] The Judge then allowed Mr Weston, as he himself wanted, to take all chattels listed except those marked with an asterisk. Mr Weston elected to take a significant number, depriving WIL of the ability to resume the business as a going concern. He sold some at a garage sale for $6,392.50 and then looked to WIL to take the balance back. The Judge was right to conclude that Mr Weston could not do so in the face of the order and his election.

[63] As to the value at which WIL had to buy back the assets Mr Weston left behind, the Judge was equally correct. As I have just said, WIL bought back less than a going concern. Furthermore, what Mr Weston contends for would render the agreement completely asymmetrical. He contends that it requires WIL to purchase back for $26,000 part only of the assets he purchased for $7,388. Such a gross asymmetry can never have been contemplated, let alone agreed.

Outcome

[64] I dismiss Mr Weston’s appeal. I uphold the judgment in the District Court. In principle, and unless Mr Weston is legally aided, WIL and the other respondents are entitled to costs at scale 2B. They are to file any related memorandum within 10 working days of the date of this decision and Mr Weston is to reply in the succeeding

_{10 working days.}

P.J. Keane J