David Reid wins case against Aussie partner

22:48, Aug 02 2012

The founder of a successful building franchise in New Zealand has won a court case against a partner in his collapsed Australian company.

David Reid, who set up the franchise David Reid Homes with his father, has been awarded more than $2.85m against Russell Stephens and his luxury home company.

A decision from the Supreme Court of Queensland last week said after Reid sold his business in New Zealand, he set up in Australia.

His firm, DRH Australia, earned its income from fees paid by franchisee builders.

It was a different company to David Reid Homes Australasia, which uses his building systems but without David Reid's involvement.

Reid and his wife held half-stakes in the master franchise business until they were approached by Stephens in 2007 about buying into the company.


Stephens, who made millions from a cleaning products business in England, had no background in building but had become a David Reid franchisee in Brisbane.

Shortly after Stephens agreed to pay $3.75m for a half share in the master company, DRH Australia failed and Stephens lost virtually all his money.

Reid said Stephens had paid his initial instalments but later left him $2.45m out of pocket.

Summing up the case, Judge Jean Dalton said Stephens came across as naive.

He had had ample access to the accounts during due diligence but appeared to have taken little interest in the cashflow of individual franchisees, who were the bedrock of the business.

''The individual franchise businesses were to construct homes which averaged in price at around A$600,000 to A$700,000; that is, they were not to be budget homes.

''The financial capacity of individual franchisees was important in assessing their viability.''

However, Judge Dalton agreed Reid had failed to mention an important fact -  that he had personally guaranteed the finance for four franchisees who had been unable to pay their fees upfront.

Regardless of this, the judge said he could not guess whether the franchises had anything to do with the company's failure, as no evidence was placed before him on that subject.

Stephens ''was enthusiastic but naïve in his approach to purchasing the share in DRH Australia''.

''The accountant who worked for DRH Australia thought the purchase price for the share surprisingly high.''

Judge Dalton ruled that Stephen's company should pay Reid and his family trust $1,602,220 and that Stephens himself should pay Reid $1,519,026. The amount included interest.

David Reid Homes' business interests stretch to the UK as well as Australasia. However, a string of failures in recent years have dogged David Reid Homes franchisees in New Zealand , as residential home building plunged to historic lows.

Nelson's David Reid Homes franchise went into liquidation in 2010, following the collapse of other franchisees in Wellington, Manawatu, Pukekohe and Marlborough.