"Overall the subject property is considered to be in an average state of repair, order and condition, with significant internal and external painting required. We should point out that a substantial damp area was noted to the rear of 364 Catherine Street and we would suggest that a Building Report be undertaken to ascertain any faulty drainage on the site."
20 As the state of repair of the Leichhardt property at the time of its sale became an issue at the hearing before me, I note that in describing particular accommodation provided by the property, Mr Briggs' report noted that "[o]verall 360 Catherine Street is in substantial need of repair and refurbishment particularly to the Laundromat and first floor residence" and that the residence at 362 Catherine Street "is in substantial need of cosmetic repair and maintenance."
21 Under the heading "General Comments", Mr Briggs reported:
"Neighbourhood retail generally has struggled over the last few years with the emergence of the larger centres and supermarkets trading 7 days a week - often with extended trading hours.
In this regard it is apparent that the property has lent itself to alternative uses in recent times as noted by the occupation of the architectural office and the photography studio. This property has provided cheaper rental opportunities than limited alternative professional suites and more expensive shop fronts available in nearby Leichhardt."
Under the heading "Marketability" Mr Briggs observed:
"Although the property has future development potential to incorporate retail and residential use, we consider it initially attracts itself to purchaser investors given the steady level of income generated from the property."
22 After considering a selection of sales for retail neighbourhood outlets in the inner western suburbs of Sydney, Mr Briggs adopted the following "Valuation Rationale":
"In providing our valuation on the subject property we have predominantly used a capitalisation approach deduced from the available comparable sales evidence available.
Given the large component of residential use within the development (approximately 50%), our valuation calculations (as provided in the annexures), have included variations to the capitalisation rate, management, vacancy and apportioned outgoings to both the retail and residential components.
With respect to the capitalisation rate we have adopted a rate of 11.5% on the retail component given the fringe location of the development. The residential rental market is considered to be substantially stronger in the immediate area and in this instance we have adopted a net yield of 7.5%.
Our variation in the vacancy factor is again a reflection of the relative strengths of each use in the locality, while the management factors show a minor variation given industry charges sought by property managers for similar retail and residential property.
In summary the 'inferred' capitalisation rate on the whole of the property equates to approximately 9.03%. Based on a deduced net rental of $83,623 per annum this equates to $926,000, but say $925,000."
23 Mr Briggs expressed the opinion that the current market value of the Leichhardt property as at 13 May 1999 was $925,000.
24 The Leichhardt property was advertised in The Sydney Morning Herald on 1 May and 8 May 1999 and the Wentworth Courier on 28 April, 5 May and 12 May 1999. FPD by letter dated 7 May 1999, which was copied to the Bank, reported to CDH that response to the media advertising of the Leichhardt property had been excellent. It advised that forty-one enquiries regarding the property had been received, thirty-six copies of the "Investment Report" had been issued, and ten contracts had been requested and sent. The letter included the following comment:
"As a result of the formal/ informal inspections conducted, prospective purchasers have indicated interest in the vicinity of $900,000 - $950,000. The comments which support those opinions can be summarised as follows:
1. Fringe location
2. Poor quality tenants
3. Condition of the property is poor.
In summary the level of interest generated by the campaign has been excellent and we are expecting a number of bidders will attend the auction."
25 As is mentioned above, the Leichhardt property sold at auction on 20 May 1999 for $1,225,000.
26 Mr Aldridge SC, Counsel for Dr Gomez, was critical of the Bank for not having obtained a valuation of the Leichhardt property on the basis that the land in the four titles comprising the property would be sold separately. Mr Briggs conceded in cross-examination that his valuation could possibly have been different if it had been undertaken that way and that the valuation of the property as a single holding resulted in a higher land tax figure.
27 Mr Aldridge also criticised the extent of the marketing campaign conducted in respect of the Leichhardt property and its failure, as he contended, sufficiently to emphasise the development potential of the property. In addition he argued that the Bank had entered into leases in respect of the property in which the rental was lower than the market rent and that this had resulted in Mr Briggs, who assumed the rents to be market rents, arriving at a valuation figure that was below fair market value.
28 Finally Mr Aldridge criticised Mr Briggs for having adopted, as Mr Briggs agreed that he did, a conservative capitalisation rate for the commercial premises that formed part of the Leichhardt property. Mr Briggs sought to justify the capitalisation rate adopted by him by reference to the poor state of repair of the properties. Mr Phippen, by contrast, adopted the approach of deducting from the value of the Leichhardt property at which he arrived, the costs, other than ordinary maintenance costs, of placing the property into an appropriate state of repair.
29 It is not necessary, in my view, for the purposes of this application for me to undertake a careful critique of the valuations of Mr Briggs and Mr Phippen respectively. First, the property was sold for a figure appreciably higher than Mr Briggs' valuation. For this reason, only criticisms of his methodology which could impact significantly on his valuation will be of relevance. Secondly, the evidence that is before me as to the steps that were taken in relation to the sale does not suggest that the Bank failed in any serious way to take reasonable steps to obtain a proper price for the Leichhardt property. The decision of the Bank to sell the Leichhardt property in one line, and to obtain a valuation of it on that basis, has not, in my view, been shown to be unreasonable in all of the circumstances. Thirdly, and most importantly, the evidence before me suggests that, whatever theoretical criticisms might be open to be made of the marketing campaign in respect of the property, the availability of the property for purchase became widely known amongst persons likely to have an interest in purchasing it. I see no reason to conclude that Dr Gomez has a reasonable prospect of being able to persuade the Supreme Court that the Bank ought not to have placed reliance on the report as to the success of the marketing campaign for the property provided by FPD and on the other professional advice received by it. In this circumstance, the price actually obtained for the property is powerful evidence that Mr Phippen's valuation, prepared well after the date of sale, is not reflective of the true market value of the property as at the date that it was sold.
30 I am not satisfied that Dr Gomez has a reasonable prospect of satisfying the Supreme Court that the Bank so failed to take reasonable steps to obtain a proper price for the Leichhardt property that it was guilty of unconscionable conduct.
The Eastwood Property
31 The Eastwood property was auctioned on the instructions of the Bank on 27 May 1999. A contract for the sale of the property was completed on 30 June 1999. The sale price for the property was $590,000.
32 Dr Gomez contends that the market value of the Eastwood property at the time of its sale was $1,200,000. That is, he contended that the property was sold by the Bank for 49% of its true market value. Again he relies on the expert opinion of Mr Phippen. In a valuation report dated 11 October 2000 Mr Phippen expressed the opinion that the Eastwood property as at 20 May 1999 had a fair market value of $1,200,000.
33 The Bank also retained CDH to provide it with advice with respect to the leasing and sale of the Eastwood property. The Eastwood property is part of the Eastwood Village Square shopping centre. The Eastwood property was comprised of a larger area used as a gymnasium and a smaller vacant area ("suite 20A") partitioned as five offices together with reception and waiting room.
34 CDH obtained from LJ Hooker Eastwood ("LJ Hooker") a rental opinion and marketing/advertising plan and budget in respect of suite 20A. LJ Hooker advised the Bank that it had been trying for several months to lease suite 20A for Dr Gomez at a rent equivalent to $577 per week including outgoings. It recommended marketing suite 20A at $450 per week and advertising the property in The Sydney Morning Herald on Saturdays and Wednesdays and in the local Chinese newspaper, the Sing Tao, also on Saturdays and Wednesdays.
35 The Bank appointed LJ Hooker as leasing agent for suite 20A on an exclusive basis for a four week period ending Monday, 20 July 1998. The Bank gave instructions that the space was to be offered at a rent of $500 per week but with a proviso that following negotiations a net rent of $450 per week could be accepted. The advertising program recommended by LJ Hooker was approved by the Bank. On 27 July 1998 LJ Hooker advised the Bank that although it had been advertising and working on the premises for almost a month the results were not positive. It had formed the view that the existing rent was too high and asked if it could "try $450 per week and see how it goes?" The Bank determined at the end of LJ Hooker's four week period of exclusive agency that suite 20A should be the subject of a general listing without advertising with the asking rental remaining at $500 per week net but with the proviso that after negotiations $450 per week would be accepted.
36 CDH obtained comment from Raine & Horne Eastwood ("Raine & Horne") with respect to suite 20A. By letter dated 15 August 1998 Raine & Horne advised, in effect, that while the asking rent was not outside of what appeared to be an acceptable range, several characteristics of suite 20A distinguished it unfavourably from properties recently rented in the local market. Raine & Horne also noted there appeared to be little demand locally for the premises. Subsequently LJ Hooker and Raine & Horne were appointed joint co-leasing agents of suite 20A. On 12 October 1998 CDH instructed Raine & Horne to arrange advertising in respect of suite 20A for three days that week and again in two weeks' time if the premises were not leased. On 21 October 1998 CDH instructed Raine & Horne to arrange for the cleaning of the carpets in suite 20A. A letter dated 20 November 1998 expressing interest in negotiating in respect of a lease of suite 20A at a rent of $20,000 per annum was received by Raine & Horne and provided by CDH to the Bank. It is not clear whether the figure of $20,000 was intended as a gross or a net figure. In either event the figure was below the rent being sought by the Bank. There is no evidence as to the Bank's response to the expression of interest. In the events that happened the Bank was not able to lease suite 20A.
37 Dr Gomez gave evidence that the lease over the area of the gymnasium had expired in early 1995 and that at that time the owner of the gymnasium business had said that he agreed to a rent of $102,000 gross per annum plus a percentage of outgoings and that after two years he would pay all outgoings. Dr Gomez was not cross-examined as to this evidence and I therefore accept it. It was sometime later than early 1995, however, that the Bank obtained possession of the Eastwood property.
38 The Bank obtained a writ of possession in respect of the Eastwood property on 25 May 1998. On 12 June 1998 CDH sought a copy of the executed lease of the gymnasium premises from the tenant. By letter dated 11 August 1998 CDH advised the tenant of its understanding that the lease had terminated on 28 February 1998 without the option to extend the term having been exercised so that a month to month tenancy had resulted. It further advised that there was no record of the tenant having paid its share of the outgoings of the property and that there had been under payment of rent during two time periods.
39 By letter dated 25 September 1998 the tenant of the gymnasium space responded that it had written to Dr Gomez advising that it was willing to consider taking up the option provided by the lease provided that the rent was reviewed. It further advised that it had paid reduced rent following the flooding of the property during a rainstorm and subsequently because Dr Gomez "was difficult to deal with and would not make decisions". It advised that a new lease had been signed between Dr Gomez and the tenant in November 1996 but backdated to March 1996. The letter concluded:
"In relation to the current rental situation, our company is currently trading at a heavy loss and we are uncertain if we should continue trading. To assist us in making a decision we would like to make the following offer for a new lease, Annual rental 60,000.00 gross. A rental period of 2 years with 2x2 option. We would like to begin making reduce [sic] payment as from 1st October 1998."
40 It later became apparent that the tenant claimed that in July 1996 it had reached an agreement with Dr Gomez that the rent payable by it would be treated as gross rent with the tenant having no liability for outgoings. The Bank's solicitors advised that this assertion was consistent with Dr Gomez not having taken steps to recover outgoings from the tenant.
41 By letter dated 5 November 1998 the Bank advised the tenant that it required the rent to be paid on time and that "the follow up of this is becoming unreasonable and we must question your Company's status as a worthwhile tenant". It asked the tenant to pay the unpaid rent immediately and either to agree to the terms of the lease or exit the property.
42 By letter dated 10 November 1998 the tenant proposed a new lease commencing on 1 December 1998 with the rent being $79,000 per annum gross for the first year and $82,200 per annum, gross for the second year. It provided to the Bank an extract from a valuation obtained by it which expressed the opinion that the fair market rent for the space used by the gymnasium was $82,000 per annum gross. By the same letter the tenant offered to purchase the Eastwood property for $680,000.
43 Following negotiations a new lease for two years was entered into between the Bank and the tenant of the gymnasium space at a rental of $88,000 per annum gross fixed. That is, at the rental which the tenant asserted had been earlier agreed with Dr Gomez. The offer to purchase the property for $680,000 was rejected on the basis that the Bank would not be able to accept the offer without either commissioning a new valuation or putting the property to auction. Subsequently, as is mentioned above, the tenant decided to sell its gymnasium business and the Bank acted on the basis that the tenant would no longer be interested in purchasing the Eastwood property at a reasonable price.
44 To avoid uncertainty at the date of auction (27 May 1999) with respect to the lease of the area used as a gymnasium, the Bank consented to an assignment of the lease of that area to a newly formed shelf company which had entered into a contract to purchase the gymnasium business conducted on the premises subject to the Bank's giving such consent.
45 Both LJ Hooker and Raine & Horne were requested to, and did, provide marketing submissions for the Eastwood property. On 9 April 1999 the proposal by Raine & Horne was accepted although it involved slightly greater marketing costs than the LJ Hooker proposal.