(i) Capitalisation rate
196 Both valuers accepted that the higher the capitalisation rate, the lower the value of the property. The evidence of Mr Azar was that capitalization rates tended to match interest rates so that if interest rates fell then capitalization rates would tend to fall as well. Mr Azar gave evidence that he thought that capitalization rates in 2006 had been "fairly stable". I would infer from what he said in the witness box that he would accept that whatever the property was valued at as at August 2006, it is likely it would have been worth at least the same at the beginning of that year.
197 The capitalisation rate adopted by the respective valuers was derived from their analysis of a number of sales.
198 Although the experts differed as to the comparable sales (which I consider below), the real difference between the experts in relation to capitalisation rates seemed to be what (if any) adjustment was necessary from the gross yield otherwise produced by reference to the available comparables. I understood Mr Sorrenson's evidence to be that an adjustment was necessary to reflect a management or maintenance allowance for the property over the period for which someone purchasing the property would expect to calculate its return on purchase. Mr Sorrenson looked at a return on initial equity over 15/16 years and said that it was totally impractical to assume a property would be fully let over that period so that an adjustment would also be needed to take that into account.
199 While allowances for management/maintenance outgoings (and for the possibility of vacancy) appear to have been included in Mr Sorrenson's calculations of net income or yield from the property (as indicated in a comparative valuation check sheet handed up to me by Mr George during submissions), I understood Mr Sorrenson's evidence to be that there was the need for an adjustment of the overall capitalisation rate (ie to reduce the gross yield from, say, 7.5%/7.3% to 5.75%/6%) even after such an allowance was made in calculating the net income. Mr Azar did not appear to include a management/vacancy allowance in the deductions for outgoings, though he did include maintenance costs. Nor did he appear to build those allowances into the capitalisation rate he applied.
200 Mr Sorrenson said that the same methodology had been applied by him when considering 779 Punchbowl Road (a property sold in March 2006 with a return yield calculated by him at 7.39%), but that the difference between it and the subject property was that the latter was fully developed, although his report was criticised for not having included the process relating to that valuation methodology.
201 Mr Sorrenson was criticised for adopting a capitalisation rate between 5.75% and 5% when the prevailing interest rate was 6%. It was put to him that capitalisation rates would be assumed to be higher than Reserve Bank cash rates at any particular time because an investor would want to see a premium (say from 2-4%) over the bank interest rate and therefore one should assume that if bank interest rates went up so, too would the capitalisation rate. Mr Sorrenson did not accept that proposition. In that regard, Mr Sorrenson's explanation (that real property investors also look to capital appreciation) seemed to me to be quite logical.
202 Both valuers' reports were the subject of criticism as to errors (there being at least two numerical errors in the transposition of gross returns/yields in Mr Sorrenson's report and there being various errors identified in Mr Azar's report (see Mr Sorrenson's affidavit of 19 October 2007)).
203 The underlying logic for an adjustment downwards from a gross 7.5% yield seemed to me to be rational. It did not appear to me that the transposition errors had materially affected Mr Sorrenson's overall analysis and he explained cogently in the witness box the methodology he had used. However, the extent of any adjustment appears to be a matter for opinion on which experts may legitimately differ, just as the subjective adjustment in assessing the comparability of properties may produce different results. Therefore, as I understand it, any figure arrived at by the capitalisation exercise needs to be tested by references to the per square metre cross check (which I consider below).
(ii) Comparable sales
204 According to Mr Sorrenson one of the best comparables was 816 Punchbowl Road which was sold in June 2006 and was a two storey shop and residence. This was sold at a price reflecting a gross yield of at least about 7.58%. It is said by Mr Sorrenson to have had a square metre land value of $1,967 per square metre.
205 Mr Sorrenson considered 816 Punchbowl Road to be in a relatively comparable trading position. Mr Azar disagreed and contended that 816 Punchbowl Road was in a superior position but conceded that it was a comparable.
206 Both valuers calculated the return yield for that property at over 7.5% (Mr Azar said it was 7.58%; Mr Sorrenson said the gross yield for that property was 7.85%). The yield on the other comparable sale accepted by both valuers (779 Punchbowl Road) was in the order of 7.3%/7.4%.
207 Mr Azar relied upon a broad range of properties, many of which did not appear to be directly comparable. In this regard, Mr Azar's valuation is said to be compromised by the fact that he had used both one and two storey properties in his comparables (a factor which Mr Azar contended was balanced by reference to the square metre cross check).
208 On the material before me, I would accept Mr Sorrenson's assessment that the sales of the two other properties in Punchbowl Road (816 and 779) provided the most reliable comparables (producing a gross yield of somewhere in the order of 7.35 - 7.5%).
209 The question was how much adjustment was needed to reflect the allowances necessary to be taken into account when arriving at a net yield. As noted, Mr Sorrenson adjusted the capitalisation significantly (down to 5.75% - 6.00%). Mr Azar adjusted it far less (down to 7.25%). The appropriateness of these adjustments is, as I understand it, best tested by the cross check mechanism.
(iii) Cross check
210 It was difficult to test the respective valuers' positions against each other, as they each adopted a different basis for the cross check. As noted above, the valuers were in disagreement as to whether the appropriate check valuation was improved land value (ie the square metre area of improved land or "improved dirt", as Mr Azar said) as Mr Azar contended or on the value per square metre of the building, ie lettable area.
211 Mr Sorrenson says the more reliable method is the latter, ie based on lettable floor area since a two storey building should logically produce more rental than a one storey building. Mr Azar, in response, says that this can be unreliable. If drawn from the lettable area disclosed on the face of registered leases, I would have thought the improved land value method should be reasonably reliable.
212 The difference can be illustrated by the fact that the check method based on improved land value on Mr Azar's valuation of $645,000 produced a rate of approximately $1,854 per square metre, but on a gross building area check a valuation of $645,000 would have translated (on Mr Sorrenson's calculations) to approximately $927 per square metre.
213 Mr Azar said that capitalised at 7.25% the subject land would represent an improved land value rate of $1,854.57 per square metres which was considered to be "within market range". However, Mr Azar conceded in cross-examination that the range of properties used by him the subject property was the lowest number. Therefore, Mr Azar's square metre land value of $1,854 per square metre for the subject property was, objectively, outside the range of properties he considered, assuming (as seems logical) that the subject property itself cannot be included in the range for comparative purposes. Something cannot be said logically to fall within a range by extending that range - a proposition which Mr Azar would not accept.
214 Mr Azar asserted that the fact of a greater lettable area would be taken into account by or reflected in a higher overall purchase price (ie that the sales price would itself reflect the difference in lettable floor area) and so a value per square metre of building area was appropriate.
215 The relevance of this point of dispute is that the Punchbowl property was more heavily improved than the comparables at 816 and 779 Punchbowl Road. On that basis it seems logical to me that a cross check based on the lettable floor area value (and not, simply on the basis of improved land value) is likely to be more reliable.
216 In that regard, Mr Azar was unwilling at first to concede that in general if there was double the lettable floor area of a building this would significantly increase the value of the building. He suggested that as a general principle this might not be the case because the property in question might be over-capitalised. However, Mr Azar did subsequently concede that he had inspected the Punchbowl property and that the second storey did increase its value.
Conclusion as to value
217 There was no immediate comparison between the results of the respective cross check methodologies used by the valuers, as they each proceeded on a different basis.
218 What seemed to me to be the most reliable basis on which to proceed (and one which accords with the methodology advocated by both valuers) was to start with the indication of gross yield determined from comparable sales (7.3% - 7.5%) and to adjust that as necessary to reflect the differences in the property (the subject property being a more developed or improved property in a similar or perhaps slightly inferior trading position to the closest comparables at 816 and 779 Punchbowl Road) and, accepting Mr Sorrenson on this point, the need to take into account expenses and contingencies of the kind indicated by Mr Sorrenson.
219 Any such adjustment involves a degree of subjectivity. Having considered the evidence of both valuers, I would have been inclined to adopt a perhaps more conservative adjustment than Mr Sorrenson (say, adopting a yield of 6.75% - 7% rather than a yield of 5.75% - 6%).
220 On Mr Sorrenson's net income figures that would produce a property value at between $718,903.70 and $693,228.00 and on Mr Azar's net income figures between $696,962.96 and $672,071.43. On a 6.5% yield the property values would increase to between $746,663.85 (Sorrenson) and $723,769.23 (Azar) (in each scenario assuming the valuers' underlying arithmetical calculations are correct). In either case, the market value would be higher than the maximum which Mr Azar was prepared to concede ($670,000), although a 6.75% yield would be very close to the lower end of his range. (Mr Sorrenson was prepared to concede a minimum price of $750,000.)
221 If I had to place a value on the property as at 23 August 2006, I would have placed it at the lower end or just below the range Mr Sorrenson had indicated, namely somewhere in the order of $720,000 - $750,000, which equates to a 6.75% - 6.5% yield. (I note this produces a result of not much less than Mr Kassoum and Mr Ghaleb had told the bank they considered the likely value of the property in January 2006.)
222 This supports the conclusion that the sale was at an undervalue in August 2006. While I accept that this may be a factor to be taken into consideration when considering whether the sale is otherwise sufficiently "colourable" to warrant a finding of equitable fraud, for the reasons set out above I do not believe there was the necessary fraudulent intent or design on the part of the Kassoums, even taking into account this factor, to warrant a finding of fraud.
· Did the Powers' interest have priority?
223 Given my finding as to the lack of equitable or statutory fraud it is not strictly necessary for me to address the final submission or "last defence" made for the Kassoums which was that even if the El-Kazzi/Estephan charge survived the Kassoums' registration as owners, any equity El-Kazzi/Estephan had in the land was inferior to and did not have priority to the interests of the other (earlier) caveators, Powers and El-Azzi, or the Kassoums (and hence no loss was suffered as a result of the transaction because the Powers' loan would have exhausted all of the sale proceeds). However, I should note that I do not accept that submission.
224 Mr George submitted that an equitable charge is not much better than a mere equity and gives no right to land itself but simply gives rise to an entitlement to order for judicial sale or to approve receivers.
225 However, in Waimiha it was said that a charge involves some deduction from the rights of ownership in the property, rather than a mere interference with a right to possession - Waitomo Wools (NZ) Limited v Nelsons (NZ) Limited 1 NZLR 484 at 490 (adopting Re Price (1931) 26 TasLR 158 at 160).
226 Whatever be the appropriate characterisation of an equitable charge, both Mr Powers and Mr El-Azzi had equitable interests in remarkably similar terms to, and granted later than, the El-Kazzi/Estephan charge. Although Mr Powers' caveat referred to an equitable mortgage, it seems that in fact he had only an equitable charge on the same basis that it was contended by the Kassoums that El-Kazzi/Estephan had no more than an equitable charge. The statement of claim lodged by Mr Powers makes this clear. Mr Powers' amended statement of claim pleaded that it was a term of the loan and mortgage that in the event of default the monies owing "shall be charged on any real property owned by [the Moujallis and Aziz Moujalli] and that [Powers] has the right to take possession and sell the real property".
227 The Powers' loan and mortgage documentation were not in evidence. If the relevant clause (s) was (or were) to the effect pleaded, then it would appear that what Mr Powers was granted was an equitable charge over, inter alia, the Punchbowl property.
228 The El-Azzi mortgage contained the same charging clause as for El-Kazzi/Estephan and Loan Agreement same typeface and format. Presumably the same precedent was used by Mr Estephan who was the broker for that loan.
229 As a practical matter it has been said (Law of Mortgages, para 4.22) that the date on which caveats are lodged will rarely be significant. Moreover, see the dicta of Hamilton J in Capital Finance (where his Honour was assessing priority as between two unregistered interests, an equitable mortgage and a statutory charge) gave no indication that the former was a "better" equity per se. Accordingly, Mr Young submitted that even if Mr Powers' interest was that of a full equitable mortgage, that would simply go to the relief available; in terms of priorities it would be equal to that of an equitable charge.
230 As between unregistered interests, the general law of priorities is that where the equities are equal, the first in time prevails: 'qui prior est tempore potior est jure".
231 In Butler v Fairclough Griffith CJ said:
In the case of a contest between two equitable claimants the first in time, all others being equal is entitled to priority.
But the claimant who is first in time may lose priority by any act or omission which had or might have had the effect of inducing a claimant later in time to act to his prejudice.
232 Isaacs J said:
The protection given by the Act to an unregistered and perhaps, unregistrable transaction is coupled with the price of diligence in guarding others against loss through ignorance of the transaction.
233 What is the alleged postponing conduct? In J & H Just (Holdings) Pty Limited v Bank of New South Wales (1971) 125 CLR 546 it was recognised that a failure to caveat may render the equities not equal though it would not necessarily be the case that the first to caveat would prevail.
234 The Kassoums rely on cases where the failure to caveat led to the prior interest being postponed - Person to Person Financial Services Pty Ltd v Sharah [1984] 1 NSWLR 745; Double Bay Newspapers Pty Ltd v Air Holdings (1996) 42 NSWLR 409. Mr George submits in effect that this is a case of "caveat or perish". Mr George submits that El-Kazzi/Estephan well knew what a caveat was, and its importance, because Kulnura Finance did lodge a caveat to record an interest in the Greenacre property (relying upon the Loan Agreement for its provenance).
235 Insofar as the Kassoums argue that a failure by El-Kazzi/Estephan to caveat their interest led to their acquiring the property, it seems to me that had the intent of the Kassoums in fact been to cheat the plaintiffs out of their claimed interest they could hardly rely on a lapsed caveat as protection.
236 It was suggested by Mr Young that an inference could be drawn that El-Azzi, at least, was aware of the El-Kazzi/Estephan interest, since Mr Estephan had brokered his loan. That does not seem to me necessarily to follow. However, neither is there any evidence to suggest that El-Azzi placed reliance, when entering into his loan, on the lack of any prior interest.
237 As for Mr Powers, there is no evidence either way to suggest whether he placed any reliance on lack of a caveat over the Punchbowl property when entering into his loan. There was no evidence as to what searches or enquiries Mr Powers made before he entered into the loan or as to the circumstances in which it was made. Mr Young submits that fact that Powers was so aggressive in promoting his interest does not elevate his interest outright. His promptness in protecting and enforcing his rights (compared with the apparent willingness of El-Kazzi/Estephan to allow time for the Moujallis to make arrangements to pay) and the size of the loan, suggests that he may as a matter of prudence have made those enquiries, but there is no proper basis on which I could draw that inference. There is simply no evidence that Mr Powers checked to see if any other interest/charge on Punchbowl property before making his loan. (It might equally be that he thought it unnecessary for him to do so, since the principal securities he obtained related to other properties.)
238 In Elderly Citizens Homes of SA Inc v Balinaves (1988) 72 SASR 210 it was significant in assessing priorities that the holder of the earlier interest had filed and then withdrawn a caveat. Here, on the available evidence, it seems doubtful that the initial failure to caveat or the lapsing of the caveat could be said to have led to the other equitable interest holders having taken any action justifying postponement of the earlier interest in time. Mr Powers must have been on notice of a caveat on title at the time he entered into the settlement with the Moujallis, his solicitors having prepared the lapsing notice for its withdrawal.
· Relief for statutory fraud
239 If there had been statutory fraud, then the Kassoums would take the land subject to the charge of which they had notice. The High Court said of statutory fraud in Bank of South Australia v Ferguson at 256:
The points of significance for the present litigation are that (i) statutory fraud embraces less, not more, than the species of fraud which, at general law, founds the rescission of a conveyance; and (ii) statutory fraud is not itself directly generative of legal rights and obligations, its role being to qualify the operation of the doctrine of indefeasibility upon what would have been the rights and remedies of the complainant if the land in question were held under unregistered title.
· Relief for equitable fraud not amounting to statutory fraud
240 Again this does not arise, given my findings above and since the fraud alleged, if established, would have amounted to statutory fraud. However, if there had been equitable fraud of a kind which nevertheless did not amount to statutory fraud, then El-Kazzi/Estephan would have been entitled at the least to compensation for the loss suffered by them by reason of the transaction. That loss, it seems to me, would be loss of the opportunity to rank ahead of the other equitable interest holders on any sale of the property by Mr Powers as mortgagee.
241 Since Mr Powers was pressing to sell the Punchbowl property, it seems reasonable to assume that if the transfer to the Kassoums had not gone ahead he would have proceeded to execute his power of sale. An issue would then have arisen as to priority out of the proceeds of sale. If, as I think, the equitable interest of El-Kazzi/Estephan would have had priority over the Powers' interest, then by reason of the sale which transpired they have been deprived of the (likely) result that they would have recovered the amount of the loan and interest thereon. This, in my view, would have been the measure of any compensation for equitable fraud.
Conclusion
242 The plaintiffs have not established equitable or statutory fraud. I dismiss the plaintiffs' claim.
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