Issue
- Where a developer has lost the opportunity to proceed with a development because the land acquisition contract was terminated due to the default of the land owner, is the developer entitled to damages for its potential loss of profit?
- What if in all likelihood the development would not have actually proceeded?
- What if the developer could have made a loss if the development was carried out?
Case
In the recent Queensland Court of Appeal decision in Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Limited [2017] QCA 254, the developer was awarded substantial damages in the above circumstances despite the court finding that there was a low likelihood that the development would have actually proceeded based on feasibility and could have made a loss if carried out.
Facts
In November 2009 Principal Properties Pty Ltd (Developer) entered into an option agreement to purchase part of land owned by Brisbane Broncos Leagues Club Limited (Land Owner).
The option agreement was conditional upon the Developer obtaining a development approval by November 2012 and required the Land Owner to consent to the Developer’s application.
The Landowner failed to consent to the Developer’s development application and the Developer subsequently terminated the option agreement in September 2013 for the Land Owner’s breach.
The Developer sued the Land Owner claiming $7.5m for loss of profit in connection with its planned development of 54 serviced apartments in Red Hill.
Initially at trial the Qld Supreme Court awarded only nominal damages on the basis that more probably than not the development would not have proceed and would have made a loss, however this was overturned by the Qld Court of Appeal.
Requirements for loss of opportunity
McMurdo JA of the Qld Court of Appeal set out the necessary requirements as follows:
- the lost commercial opportunity had some “value” – more than just a theoretical or nominal value;
- in essence, the Court held that if a commercial opportunity has no chance of being profitable, it is an opportunity of no value and loss could not be compensable. However, a commercial opportunity may still have value, even though more likely than not, the developer would not be profitable after money is spent in pursuing the opportunity. This is because the magnitude of the potential profit, considered against the relatively small amount of the potential loss, makes the risk, sometimes a high risk, of that loss one which is worth taking;
- in this case, the developer’s loss of opportunity had value;
- the fact that at least some loss or damage caused must be proved (on the balance of probabilities):
- the question in this case was whether the opportunity to profit from this development had a value and whether that was possible, even though the developer’s loss was more likely than a profit. If it did have a value, there was a compensable loss and the extent of that loss would have to be assessed; and
- the value of the of the lost opportunity is then ascertained by reference to the degree of probabilities or possibilities of relevant factual hypothesis.
Assessment of Risks
The trial judge identified six contingencies impacting the likelihood of the development proceeding and the probability of fulfilment, as follows:
The above calculation of probabilities was accepted as “not substantially inaccurate” on appeal. However, McMurdo J’s assessment of the legal implications differed as follows:
‘There was more than a negligible prospect that the appellant could have undertaken this development. There were contingencies which could have prevented the development from proceeding: the car park question, the finance required to purchase the site, the finance required for construction and the achievement of pre-sales of 70 per cent of the units. Nevertheless there was a substantial, rather than a negligible, prospect that the land would have been developed’.
Calculation of damages
McMurdo J found that broadly speaking, if the development had proceeded, there was potential for profit of $4,000,000 and a potential loss as high as $2,750,000.
Using $4,000,000 as the starting point, McMurdo J adopted the process for calculation referred to by the trial judge (which would have been applied if substantive damages were awarded at trial).
In this regard, the trial judge found that the:
- 50 per cent chance that a complying development permit would not be obtained,
- 50 per cent chance that the land would not have been acquired, and
- 60 per cent chance that the required pre-sales would not have been reached at the Developer’s prices,
equated to an overall prospect of achieving a profit of 10 per cent before discounting for any other risks including the financing and sales risks. McMurdo applied a further reduction for the prospect, although relatively small, that the project would have resulted in an overall loss,
Ultimately, the developer was awarded $250,000 as damages.
Key take away
A low or remote possibility that a profit would have been made, doesn’t necessarily preclude an entitlement to damages where another party has by its breach caused the loss of that profit making opportunity.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.