National Australia Bank Limited v Sayed

Supreme Court of NSW|2018-05-07|Before: McCallum J, Adams J

Judgment

HER HONOUR: These proceedings began as a claim for possession brought by National Australia Bank against Bilal and Nicole Sayed in respect of their residential property at Woonona. The loans secured by that property were also secured by a vacant development property at Corrimal consisting of two adjoining lots. The Corrimal property had been sold by the bank as mortgagee in possession prior to the commencement of the proceedings. Mr Sayed has brought a cross-claim against the bank for breach of its fiduciary duty as mortgagee in possession in respect of that sale.
The issues raised by the claim for possession were resolved in an "In Principle Agreement" entered into by the parties shortly after the commencement of a hearing before Adams J. There was further litigation concerning the terms and enforceability of that agreement which it is not necessary to summarise. In short, all that remains in the proceedings is to determine Mr Sayed's cross-claim.

Matters not in issue in the proceedings

The cross-claim was case-managed by Davies J who was required to determine many interlocutory applications. During that period the pleading of the claim underwent numerous revisions. One amendment Mr Sayed repeatedly sought to make concerned an allegation that the marketing of the Corrimal property had proceeded on the false basis that the larger lot was "landlocked" by the smaller lot. The bank opposed those amendments on the basis of delay coupled with the contention that, if it had breached its duty as mortgagee by wrongly making that assumption, it had lost the ability to cross-claim against the agents who gave the bank that allegedly wrong advice (because any such claim would now be statute-barred). Justice Davies accepted the bank's submissions on that issue and refused leave in respect of that proposed amendment: National Australia Bank v Sayed (No 6) [2016] NSWSC 1253 at [48]. After the publication of that judgment, Mr Sayed again sought to make further amendments to include the "landlocked land" allegation. Justice Davies refused leave to make those amendments and, in February 2018, ruled that no further notices of motion were to be filed or served without leave: National Australia Bank v Sayed (No 10) [2018] NSWSC 108.
In accordance with those decisions, Mr Sayed is confined to the claims pleaded in the second further amended first cross-claim filed on 28 April 2017 (set out above).

Content of the equitable duty of a mortgagee exercising power of sale

The duties of a mortgagee in exercising a power of sale are now governed by s 111A of the Conveyancing Act 1919 (NSW). However, that section does not apply in the present case because the sale arose as a consequence of a default occurring before the section commenced (on 1 November 2011): s 111A(7).
In an outline of written submissions provided at the outset of the hearing, the bank submitted that, at common law, the content of the duty has been described in various ways. Mr Lucarelli, who appeared for the bank, submitted that the explanation may be historical, arising from differing views as to whether a mortgagee's duty arose solely in equity and was limited to exercising the power of sale in good faith, as held in Pendlebury v Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676; [1912] HCA 9, or at law for breach of a common law duty to take reasonable steps to achieve a sale at market value, as held in Cuckmere Brick Co Limited v Mutual Finance Ltd [1971] 2 WLR 1207.
The better view appears to be that the common law duty suggested in Cuckmere has not been adopted in Australia. The jurisprudence on this issue was discussed by Young CJ in Eq (as his Honour then was) in Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646; [2004] NSWSC 114. His Honour described the content of the equitable principle as follows (at [38]): "The duty is a duty to act conscionably towards the mortgagor and persons under the mortgagor. The duty is not to be considered in some mechanical way, but the whole of the mortgagee's conduct with respect to the sale is to be considered. The mortgagee may, up to a point, act solely in its own interests, but it must also act conscionably towards the mortgagor and those claiming under the mortgagor."
Justice Young found "difficulty" with the approach taken by the guarantors in that case of pinpointing "two possible errors in a valuation" and reasoning from them that there must have been a breach of duty. His Honour said, at [40]: "Indeed, it is a fundamental principle in the textbooks that mere inadequacy in the price obtained and the value will not normally of itself be sufficient for a mortgagor to upset a purported sale."
Mr Lucarelli's written submissions provided a list, drawn from decided cases (including cases decided under s 420A of the Corporations Act 2001 (Cth)), of the steps he submitted a mortgagee would normally be required to undertake in order to discharge the obligation to take reasonable steps to realise the mortgaged property for market value. In my respectful opinion, while reference to other decisions can provide helpful guidance, those that turn on their own facts do not create legal principles. There is a danger in drawing up such lists that they will be mistaken as having that status in future cases. Ultimately, the task is to assess the steps taken by the bank in the context of the circumstances of the case against the content of the duty considered above.

The Corrimal property

Mr Sayed provided a detailed chronological schedule of documents running to some 200 pages. The schedule was admitted only as an aid to submissions and it has been necessary to go to the primary documents (contained in over 20 folders) in most instances. The schedule was nonetheless helpful in piecing together the relevant events.
In early 2005, Mr Sayed entered into an oral joint venture agreement with Mr Taylor, who was then the registered proprietor of the Corrimal property, to develop the property. At some point that year an integrated development application in respect of the property was lodged with Wollongong City Council. By the time the bank came to exercise its power of sale in 2009, three development applications ("DAs") concerning the property had been determined by the council.
The first related to a creek that bisects the property (referred to in the development documents as the watercourse). On 14 March 2006, the council granted conditional consent to undertake "remedial work to existing watercourse". Although it was the first in time, the bank refers to this as the third DA reflecting the order in which the relevant approvals came to the bank's attention during the process of sale. To avoid confusion, I will refer to it as the watercourse DA. The watercourse DA became effective on the date of its endorsement and was expressed to lapse if development was not commenced within five years from that date.
Mr Sayed became the registered proprietor of the property on 25 July 2006. As already noted, the total purchase price for the two lots was nominated on the contract for sale as being $1,500,000. However, in an affidavit relied on by Mr Sayed in these proceedings, he explained that the "real agreement" between him and Mr Taylor was for Mr Sayed to purchase one half share of the property for $500,000. The property was to be registered in Mr Sayed's name to facilitate the borrowing, as Mr Taylor was at that time unemployed. The price was stated to be $1,500,000 instead of the agreed value of $1 million because that was "more tax effective".
Mr Sayed borrowed $500,000 from the bank to pay Mr Taylor. Before the loan was granted, the bank conducted an inspection of the property. The inspection was carried out by Mr Bob Gorrey, a "securities inspection officer" employed by the bank. A witness called by the bank at the hearing, Mr Lenord, explained that securities inspection officers are not registered valuers and that the task undertaken would have been in the nature of a "curbside valuation".
Mr Gorrey identified the address of the security property as "263-267 Rothery Rd". That is not the correct description of the two lots the subject of these proceedings, the address of which is 267-273 Rothery St. Further, it appears from the valuation form completed by Mr Gorrey that he understood the property to include a three-bedroom house. He recorded the putative "owner's estimated market value" at $1,500,000. As already explained, that was not Mr Sayed's true estimate of the value of the two vacant lots at 267-273 Rothery St. Mr Sayed and Mr Taylor had agreed on a value of $1,000,000. Mr Gorrey gave the property a bank value of $1,430,000 "based on BA [presumably, building approval] being held for development of 13 units". That also appears to have been wrong. He specified a value of $1,001,000 as the bank value of the "present tenure". The date of that valuation was 19 April 2006.
In December 2006, the property was subdivided into two lots, referred to as lot 41 and lot 42.
On 3 April 2007, the council granted conditional consent for the construction of 10 dwellings on lot 42 (to which I will refer as the 10 dwelling DA). As I read the diagram in evidence (tab 2 in the folder of "critical documents"), the watercourse bisects lot 42. However, the 10 dwelling DA did not refer to the watercourse DA. As with the watercourse DA, the 10 dwelling DA was effective for a period of five years from its date of endorsement.
By April 2008, Mr Sayed had not commenced the remedial work on the watercourse and could no longer service the loan. He applied for a moratorium on loan repayments on the grounds of financial hardship. The bank granted a moratorium for five months which also extended to two months of arrears.
On 5 June 2008, the council granted "deferred commencement" consent for dual occupancy of lot 41 (to which I will refer as the dual occupancy DA). The dual occupancy DA was expressed not to operate until the watercourse works had been completed to council's satisfaction, as follows: "The development application has been determined by granting deferred commencement consent subject to the following conditions: (i) The Development Consent shall not operate until Council has been satisfied as to the following matters: (a) Documentary evidence shall be provided to Council certifying that all works approved under DA-2005/1520 being 'Remedial work to existing watercourse' have been completed in accordance with approved plans and conditions of consent. (ii) The developer must, within 12 months of the date shown on the top of this consent, produce evidence to the Council sufficient to enable it to be satisfied that the matters specified in condition number (i) have been complied with. (iii) If compliance with the matters continued in condition number (i) results in a substantial variation to the development approved deferred commencement, a new development application must be submitted."
Because the dual occupancy DA was for deferred commencement, it had no endorsement date. It stated that, once council was satisfied that the conditions of approval (set out above) had been complied with, a notice would be issued giving the date from which it would operate.
After the conclusion of the moratorium on repayments allowed by the bank, Mr Sayed continued to be unable to service the loan. In late January 2009, he negotiated with a friend, Ms Kellie Stannard, for the sale of the smaller lot, lot 41 (in respect of which the deferred commencement dual occupancy DA had been granted). Ms Stannard gave evidence at the hearing to the effect that she was keen to proceed with the purchase and had instructed a solicitor to act for her on the conveyance.

The bank's decision to sell the property

In the meantime, however, the bank had determined to enforce its securities. On 13 March 2009, the bank served a notice pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW). Mr Sayed did not comply with that notice. On 23 April 2009, the bank served a demand on Mr Sayed to pay the amount then owing, which was $541,166.55. Mr Sayed did not make any payment in response to that demand.
On 26 May 2009, the bank appointed Mortgage and Estate Realisation Company ("MERC") to arrange for the sale of the property on behalf of the bank as mortgagee in possession. Mr Sayed tendered an electronic journal maintained by MERC which provides a running record of the steps taken by MERC and others with access to the journal during the process of selling the property (exhibit 1). A number of the journal entries are attributed to Ms Rosemary Decker, an employee of MERC.
The first step taken by MERC was to instruct Mr Greg Ellul, a local real estate agent of MMJ North, to take possession of the property. At that time, it was recorded in the journal that Mr Ellul believed access to lot 42 could only be gained through lot 41 but that he would confirm.
After Mr Ellul had confirmed that the bank was "in possession", Ms Decker reported to Daniel Papadimitropoulos at the bank: "we have two parcels of land bisected by a creek. Lot 42 is landlocked and can only be accessed via lot 41 and over the creek which has a temporary access way (pipes and soil in poor condition)".
For the reasons already explained, any question of the sale process miscarrying due to a misconception that lot 42 was landlocked must be put to one side. However, the fact that lot 42 was bisected by the creek was significant. Photographs taken (probably by Mr Ellul) at around the time the bank took possession show that the wooden bridge across the creek was in an extremely dilapidated state. I am satisfied that, even without knowing about the watercourse DA, anyone inspecting the property would appreciate that remedial work would have to be undertaken to make that area safe as part of any development.
Ms Decker further reported "our agent believes that there may be an existing development approval for townhouses. He will attempt to get information from council, however it may be worth instructing Dibbs Barker [the bank's solicitors acting on the sale] to contact council to see if there is in fact a development approval and if it is current".
Following confirmation from Dibbs Barker that Wollongong Council had confirmed there was an existing development consent, Ms Decker recorded that she had "advised Greg that there is an existing development order from 2006".
On 29 May 2009, Mr Sayed wrote to the bank stating that he had located a sign posted on his property stating that the bank had taken possession. The letter informed the bank that Mr Sayed had just negotiated sale contract terms for one of the lots and that the buyer was ready to purchase the smaller lot (lot 41) for $300,000. The letter said that Mr Sayed proposed to pay the bank $100,000 towards the loan and use $150,000 towards the remedial works on the watercourse, using the remaining $50,000 for "development costs". The bank's response to that proposal is addressed below.
Over the following months, MERC received conflicting information as to the market value of the Corrimal property. First, when Mr Ellul took possession of the property, MERC asked him also to provide a market appraisal report. The letter of instruction specified that the property would have to be sold by auction.
Mr Ellul provided his appraisal report on 1 June 2009. It is clear from the terms of the report that, apart from having inspected it when he took possession, he had some familiarity with the property as a development site. By that time, Ms Decker had confirmed to him that there was a development consent in place. In addition, he stated in his appraisal report that he had "the advantage of current plans". When he gave evidence at the hearing, Mr Ellul could not remember how he came to have those plans. There was a suggestion that he may have obtained them from another MMJ agent, Daniel Hastings, who had previously been retained by Mr Sayed to sell the property. In any event, the point is that, with access to the plans, he was in a position to give an appraisal based on solid, relevant information concerning the development potential of the property.
Mr Ellul recorded that the current owner had paid $1,250,000 for the property in June 2006. In fact, that was the price for the larger lot only; the total price was $1,500,000. As already explained, that did not reflect the true agreement but, for present purposes, the question is whether Mr Ellul's reference to the price for lot 42 only indicates that he wrongly confined his attention to that lot.
In my assessment, it is clear from the balance of the report that Mr Ellul did consider both lots. He based his appraisal on the "hypothetical development" method of deriving land value, commencing with what he regarded to be the hypothetical market value of the completed units, deducting construction costs and profit margin and deriving a value of the land content of the completed lots of $50,000 per unit site. Accepting that a developer may accept a lower profit margin than he had allowed, he gave a range of between $50,000 and $60,000 per unit site which, multiplied by the 12 units (10 on lot 41 and 2 on lot 42) gave a total of between $600,000 and $720,000.
It is not clear whether Mr Ellul was aware of the watercourse DA at that stage. He certainly does not appear to have had any plans associated with it. However, he did have regard to the issue of the creek. His report said: "I am of the opinion that Wollongong City Council will insist on a great deal of work to be undertaken on the creek and a concrete bridge would need to be built." Separately, in a discussion of the construction costs for the whole development, he remarked "the creek/bridge are an unknown. However for a developer/builder with the expertise of this type of construction it should not cause too much of a challenge."
The next step taken by MERC was to obtain a formal valuation of the property. The firm retained for that purpose was Addisons. On 6 July 2009, MERC received the valuation report (prepared by Kylie Ward as at 13 June 2009). She valued the property at $1,050,000 using a "direct comparison" method. The report noted that there was "a lack of directly comparable sales evidence" and indicated that the three comparable sales used in the report were considered the most relevant available. Addisons' valuation had regard to the two approvals concerning the construction of dwellings on the two lots but made no reference to the requirement for remedial works to the watercourse. There was no analysis of development cost (as that was not the method of valuation used).
In light of the substantial difference between Mr Ellul's appraisal and Addison's valuation, MERC sought further market appraisals from two other local real estate agents. On 8 July 2009, Mr Greg Truebody from MMJ North provided an appraisal of between $600,000 and $660,000 "based on a developer paying approximately $50,000 to $55,000 per site" and assuming development consent for 12 villas or townhouses. The report did not refer to the watercourse DA but it did have regard to the need for "infrastructure such as a bridge and gabion walls" and the cost implications of that.
On 14 July 2009, the bank received a letter from a firm of solicitors then acting for Mr Sayed with a formal proposal for the sale of lot 41 for $300,000 (the proposed sale to Ms Stannard). The terms of sale proposed that the deposit would be released to Mr Sayed on condition that he lodge a development application seeking consent for dual occupancy in the same terms as the one that had previously been determined, which was described as having "lapsed" by that time (more accurately, the commencement of the DA was conditional upon the completion of the works required under the watercourse DA but the time for compliance with that condition had expired).
Ms Stannard's evidence was that she had received the plans and "probably the DA" but that she had not got to the stage where she had "put any money down". She proposed to go through all the documents with her solicitor and was not planning to proceed with the purchase unless "all the due diligence stacked up" (Tcpt, 2 May 2018, p 190 (13)). In circumstances where she was asked to release the deposit of $30,000 on a non-refundable basis upon lodgment of the further development application and take the risk as to whether it would be renewed (and, so it appears, whether Mr Sayed would this time complete the remedial work), it seems unlikely that the solicitor would have advised her to proceed.
This issue was not analysed in quite this way by the bank at the time or during the hearing before me and accordingly I am wary of resting on that conclusion. It does not form any part of the basis for my decision. I simply note that the complexity surrounding the failure to comply with the deferred commencement condition of the original dual occupancy DA would appear to vindicate the bank's later determination not to accept Mr Sayed's proposal for the separate sale of lot 41.
In any event, the proposal was not otherwise attractive for the bank. The terms of the contract of sale contemplated that settlement would be deferred for six months, at the conclusion of which no more than about $120,000 was to be paid towards the loan.
On 28 July 2009, the bank obtained a market appraisal from Tony Sloane of Huxley & Partners Real Estate. Mr Sloane described the property as one of "unusual dimensions" which presented "a few issues as to its usability". Unlike the two agents from MMJ, Mr Sloane does not appear to have had access to any plans. He noted that council had confirmed consent for only 10 dwellings, which suggests the information he received concerned only lot 42. However, he did not give his appraisal on the basis of the number of approved dwellings, saying there were "too many negatives to using such a formula". Instead, he appears to have given a broad brush appraisal of the value of the land as a vacant lot. He said "I do feel this vacant block with great potential whether as a development lot or otherwise would achieve a value of around $700,000".
On 30 July 2009, the bank rejected Mr Sayed's proposal to allow the sale of lot 41 to proceed separately. On 3 August 2009, a solicitor then acting for Mr Sayed wrote to the bank asking the reason for the bank's rejection of the proposed sale. No response was received to that letter. Mr Sayed sought to put a case that the bank rejected his offer in reliance on the misconception that, if lot 41 was sold separately, lot 42 would be landlocked. As already noted, the prosecution of any claim on that basis is foreclosed by the rulings of Davies J. In any event, in my assessment, there was good reason for the bank to reject the offer. It offered only minimal (deferred) reduction of the outstanding loan. Further, as already explained, whether or not lot 42 would be landlocked, a full understanding of the three DAs suggests there would have been a real risk in allowing lot 41 to be sold separately.
After receiving the three market appraisals, MERC sought authorisation to obtain a second valuation to determine the correct value of the property. At that time, the range of appraisals and valuations was represented in MERC's records as follows: "Valuation range $950,000 - $1,075,000 Agent 1: $600,000 to $720,000 Agent 2: $600,000 to $660,000 Agent 3: $700,000"
Mr Sayed contends that, contrary to the appearance of that email, the third agent was not within the range of the first two because he had valued only lot 42. Mr Sayed subpoenaed Mr Sloane to give evidence at the hearing and endeavoured to put that proposition to him. Unfortunately Mr Sloane had no recollection whatsoever of the relevant events, explaining that he has suffered irreversible brain damage as a result of a stroke.
I am not persuaded that Mr Sloane valued only lot 42. The letter of appraisal correctly identifies the address as 267-273 Rothery Street. Further, as submitted by Mr Lucarelli, it was not inaccurate to say as at July 2009 that consent could be confirmed by the council for only 10 dwellings, since the dual occupancy DA was not in effect at that time (because the condition requiring the remedial work to the watercourse had not been complied with within the 12 months allowed). Further, as noted by Mr Lucarelli, Mr Sloane described the block as "narrowing from the street to the back in a triangle shape" which describes both lots. Lot 42 alone is a battle axe shaped block. For those reasons, although he referred only to the approval to develop 10 dwellings, I am satisfied that Mr Sloane's approach was to appraise the land contained within both lots.
The bank did not authorise a further valuation at that time, instead instructing MERC to "engage with the valuer" to determine the reason for the discrepancy. As at 11 August 2009, the bank's internal records disclose that the file was "on hold".
On 18 August 2009, Mr Sayed wrote to the bank stating "I may have found a buyer and be able to sell the entire property and satisfy the amount owing to NAB". The bank sought further details of the proposed offer but it appears Mr Sayed did not respond to that request. Certainly, the evidence does not establish that there was a buyer who was ready, willing and able to purchase for such a price at that time.
On 19 August 2009, Dibbs Barker sent Addisons a compact disc containing further information from Wollongong City Council, including information concerning the remedial work required to be undertaken pursuant to the watercourse DA. Having reviewed that further material, Addisons revised its valuation down to $780,000, giving a range of $730,000 to $835,000 (the previous valuation was in the range of $950,000 to $1,075,000). In a report concerning the revised valuation, MERC informed the bank: "The new valuation acknowledges the difficulties of access to the land via a waterway, costs associated with access, the inability of developing the full site due to its shape and the impact of the Northern Distributor Highway which abuts the property. The valuer has dropped the unit site value from $87,500 to $65,000."
MERC remarked that the amended valuation range was still above the three agents' appraisals and reiterated its recommendation that the bank obtain a second valuation from another valuation company.
The manager at the bank responsible for overseeing the sale at that time was Melissa Thomas.
In a journal entry dated 31 August 2009, Mr Alexander Palmer, a secured recoveries specialist with the bank, wrote to Ms Thomas setting out the three agents' appraisals referred to above and stating "the Addisons valuation appears to be quite off the mark not taking into consideration the difficulties for development with this particular site". Mr Sayed took issue with that assessment, submitting that, once it is understood that Mr Sloane's evaluation concerned only lot 42, and having regard to the proposal to sell lot 41 for $300,000, Mr Sloane's appraisal was more in line with the Addisons valuation than the other two agents' appraisals. I do not accept that submission, for two reasons. First, as already explained, although he may have had incomplete information concerning the development, I am satisfied that Mr Sloane's appraisal did assess the whole of the land contained in the two lots. Secondly, although Ms Stannard was evidently serious about buying lot 41 for $300,000, it by no means follows that that was its proper value at that time. There were many unknowns and contingencies to be explored. Mr Lenord, a licenced real estate valuer, gave evidence that "valuers do not use offers as sales evidence" and that it is sales evidence that defines market value (Tcpt, 5 May 2018, p 241(27). I am not persuaded that lot 41 had a separate value of $300,000 at that time. Further, the separate sale of lot 41 had uncertain implications for the value of lot 42. In my view, it was reasonable for the bank to regard the Addisons valuation as the outlier at that stage.
On 3 September 2009, Mr Chris Karaiskos, an employee of the bank, sought instructions from Ms Thomas as follows: "This file is on hold as per instructions. Please advise on how to proceed when it has been reviewed. My recommendations [sic] is to have another valuation authorised by management then we can proceed to sell it 'as is' and have a clearer understanding of what the property is valued. There will be a surplus more likely our balance is approximately $575K plus costs"
The bank determined to obtain a second formal valuation. The firm instructed for that purpose was Kohler Bird.
On 15 September 2009, a solicitor acting for Mr Taylor wrote to the bank to inform it that Mr Taylor had an unregistered mortgage over the property for $1 million. The letter said "Mr Taylor has advised Mr Sayed that he has a potential buyer for [lot 42] for $750,000.00. That purchaser may also have an interest in lot 42 [scil: lot 41] but Mr Sayed indicated in July that it was sold." No further detail appears to have been provided.
The Kohler Bird valuation was provided on 18 September 2009. It placed a value on the property in the range of $800,000 to $900,000. It is common ground that that valuation was prepared in ignorance of the watercourse DA.
In summary, by mid-September 2009, MERC had received the following valuations and appraisals: • Ellul's market appraisal of 1 June 2009: $600,000-$720,000 • Addisons' valuation report of 13 June 2000: $1,050,000 • Truebody's market appraisal of 8 July 2009: $600,000-$660,000 • Sloane's market appraisal of 28 July 2009: "around $700,000" • Addisons' revised report of 21 August 2009: $730,000-$835,000 • Kohler Bird's valuation report of 18 Sept 2009: $800,000-$900,000

On 2 October 2009, following receipt of the Kohler Bird valuation, MERC provided a marketing recommendation to the bank. The letter described the property as follows: "Two residential allotment with access via lot 41 of 774.3 square metres to lot 42 a battleaxe block of 4,409 square metres. Access to lot 42 is difficult as there is need to cross a waterway that divides the two blocks via an old wooden structure. The valuer notes that there have been two applications to council for the lots, lot 41 'Dual Occupancy' and lot 42 10 villas and townhouses with associated car parking. MERC recommends the bank's solicitors contact council to seek a copy of any approvals. MERC recommends both properties are sold as a whole, to sell lot 41 before lot 42 would make lot 42 landlocked and any sale would need right of way over lot 41 which a purchaser may not wish to grant. Sale of lot 42 would require a right of way to be created over lot 41 before either sale. The agents consider that for the best result both lots be sold together."
Due to what was explained as a word-processing error, the letter included inconsistent recommendations as to the method of marketing. In one paragraph, the letter said that, on the recommendation of the managing director of MERC, Mr Robin Matters, the property should be sold by way of public tender calling for expressions of interest. The letter continued: "The target market for this property are developers and this is their preferred purchase method. Tenders will provide a greater indication of what the market considers the property is valued."
However, three paragraphs later, the letter said: "We recommend auction as the preferred method of sale. With the auction method there is no cooling-off period or subject to conditions and contracts are exchanged immediately. Auction prevents recrimination by the borrowers or their trustees as you have supportive evidence that the sale price was the highest obtainable in the market."
The letter concluded by recommending the appointment of Mr Ellul at MMJ North as agent and setting out projected costs including a marketing budget of $2,855.
On 7 October 2009, Ms Thomas gave MERC instructions to proceed. She gave evidence in the proceedings (called as a witness by Mr Sayed) that she was satisfied at that point that the bank had solid evidence of the value of the property in the amended Addisons valuation and the Kohler Bird valuation and that the bank would consider offers "around the 730 … to mid 800 range" (Tcpt, 1 May 2018, p 97(41)).
The anomaly in the recommendation letter (recommending both sale by tender and sale by auction) appears to have been overlooked. On 20 October 2009, MERC appointed Mr Ellul as agent on the sale with instructions to sell the property by way of tender. Dibbs Barker was to act as the bank's solicitor on the conveyance.
An email dated 27 October 2009 from Mr Elull to Samantha Minchin at MERC noted that he was waiting on the contract for sale and the DA documentation to come from the solicitors and that, after receiving that material, he would specify a tender close date. However, on 30 October 2009, Mr Ellul wrote to the solicitor as follows: "I handed the file to a developer interested in the site he has pointed out that we are missing a DA as attached. Do you have a copy if not we can contact WCC [Wollongong City Council] to obtain a copy."
On 2 November 2009, Dibbs Barker applied to the council to inspect the files again. On the same date, Mr Ellul received the contracts and fixed the tender close date for 3 December 2009.
A journal entry dated 3 November 2009 records that the agent was informed there was to be no "mortgagee in possession" advertising. Based on the journal entries alone, it could be inferred that, notwithstanding that note, the first round of advertisements in the first week of the campaign did refer to that fact. On 10 November 2009, Mr Matters asked that the agent be advised "we are no longer permitted to offer this property as a mortgagee sale". A letter was sent to Mr Ellul that day requesting a change in the advertising for the property seeking removal of all references to mortgagee in possession. MERC informed the agent that the cost of those changes was "to be absorbed into the marketing budget".
However, Mr Lucarelli noted that, so far as the evidence before me reveals, none of the advertisements in fact described the sale as a mortgagee sale. He suggested that the letter seeking correction may have been a standard letter sent in all matters then being managed by MERC. Without being drawn to speculate about that, I accept that there is no evidence to establish that the property was marketed at any stage as a mortgagee sale.
On 14 November 2009, Mr Ellul wrote to Dibbs Barker stating that he still did not have all the information he had sought from them. In respect of the watercourse DA, he had only a minor flood study. He said "I need all the rest of the documentation referred to in this DA. The watercourse improvement is the key to this entire development."
On 23 November 2009, Mr Ellul reported to Ms Minchin at MERC as follows: "Just to recap when I received the documentation from the solicitors I realised that an entire DA was missing this was for work on the watercourse. Emma obtained the DA and has been trying to obtain the plans and specifications unsuccessfully to date. I went in to council today and requested the information filled out a form and they have said that they will get it to me on disk."
As at that date, Mr Ellul said he had had a total of six enquiries and had issued three information packs concerning the property.
As at 1 December 2009, two days before tenders closed, Mr Ellul was still waiting on council to supply information concerning the watercourse DA. He reported to Ms Minchin as follows: "However I have spoken to one of the parties and he will be submitting a tender he is the only one from all the enquiries that I have had who has the expertise to deal with the watercourse and does not seem to be concerned that we don't have plans and specs for this he is prepared to take the risk. I have informed him that I have received and [sic] amended contract and has asked me to drop a copy to his solicitors which I will do this afternoon. This is a very difficult site and to be honest I also didn't relies [sic] the extent of the difficulty with building on this site."
By close of tenders on 3 December 2009, Mr Ellul had received two tenders. One was from Design Workshop Australia offering to buy the property for $500,000. The other was from Realta Enterprises offering to buy the property for $545,454.54.
Mr Sayed spent some time at the hearing seeking to establish his theory that the two tenderers were acting in concert with each other (possibly aided by Mr Ellul). The suggestion was that two tenders had been submitted in order to give the appearance of competition whereas in fact those two parties always intended to acquire and develop the property together. It was faintly suggested that Mr Ellul participated in some way in this arrangement so as to keep the price of the property down. There was scant evidence to support this speculative theory which, in any event, was not pleaded. Even if it was true that the two tenderers acted in concert, there would be no basis for visiting the bank with the consequences of any such arrangement.
On 8 December 2009, Mr Ellul reported to MERC summarising the difficulties with the three DAs. He noted that the approval for dual occupancy of lot 41 had a "major problem" because it referred to the DA requiring remedial works to the watercourse. Although that DA was not noted on the DA for lot 42, Mr Ellul expressed the view that, without the work on the watercourse, that development would also "not exist" as its only access was over the bridge that was yet to be constructed.
In that letter, Mr Ellul expressed the view that the work on the watercourse was estimated at between $300,000 and $350,000. He wrote: "I doubt whether the valuers would have allowed for this as they would not have had the information on DA 2005/1520 [the watercourse DA]. I only realised after I received the first lot of information from the solicitors as they did not realise that it existed until I pointed it out to them after requesting information from council."
Mr Ellul noted that he had received a disc containing the plans and specifications on 4 December 2009 (after the close of tenders) and that he now had four A4 lever arch files of information plus the disk. He recommended that the valuers revisit their valuation. MERC adopted his recommendations and passed them on to the bank. The bank instructed MERC to approach the valuer to revisit the valuation based on "the new findings".
On 17 December 2009, Mr David Bird of Kohler Bird reported to MERC that one of his senior valuers had reinspected the site, met with Mr Ellul and collected the various files and information gathered by Mr Ellul. In due course Kohler Bird provided a "value assessment for mortgagee sale purposes" which stated that, as at 15 December 2009, a fair market value range was $500,000 to $600,000. The author of that report was Timothy White, who gave evidence at the hearing. Mr Sayed pressed him as to the basis on which the valuation had been revised down, putting it to him that the existence of the watercourse DA increased the value of the property. Mr White maintained his opinion that, although in some instances the fact that a DA has been obtained can enhance the value of a development site, in this instance it was a negative because the works had not been commenced.
The revised Kohler Bird valuation was considered by the bank on 13 January 2010. It was noted that both tender offers were within the valuation range. The bank further noted that, if the higher tender offer was accepted, there would be a shortfall of approximately $65,000. The decision was made to accept the higher tender.
Separately, however, Mr Karaiskos requested an internal bank valuation from Mr Lenord. He undertook a "desktop" review of retrospective and current valuations and expressed the view that the offer of $545,454.54 appeared reasonable.
Concerning the initial valuation by Mr Gorrey, Mr Lenord wrote "on the face of it, the SIO valuation appears reasonable, however, being a development site for 13 units, it would have been outside policy and therefore should have been completed by a panel valuer."
Mr Lenord also wrote that he had not completed a retrospective valuation as at April 2006 as he did not have the necessary resources such as development site sales and rates per unit sites. However, he remarked that, from his experience, $110,000 per townhouse site was "not over the top". He added that the analysis of the development approval may have uncovered the issue with remedial work which would have affected the overall project viability and value.
Concerning the revised valuations, Mr Lenord said (at par 40 of his affidavit): "The fact that the valuations decreased by 25% and 35% (Addisons and Kohler Bird respectively) is not, in my opinion, of any real assistance. This simply demonstrates that the earlier valuation in each case was too high and that the valuers were not sufficiently appraised of the development constraints and cost penalty which was attached to the Subject Property."
Ultimately the bank gave instructions to accept the higher tender. Contracts were exchanged on 19 February 2010.

Mr Sayed's case

In his closing submissions, having analysed the chronology of those events in some detail, Mr Sayed submitted that the documents speak for themselves. He submitted that, by reference to the valuations obtained by the bank, the property was sold at an undervalue. He rejected the proposition that there were issues with the remedial works required to be undertaken on the watercourse, which he submitted was the bank's reason for accepting the tender bid of $545,454.54.
The bank contended that Mr Sayed's submission invites a wrong approach. Mr Lucarelli submitted (with respect, correctly) that it does not follow from the fact that the property did not sell for what Mr Sayed believes was its market value that the bank must have breached its equitable duty as mortgagee. He submitted that the proper approach is to consider the steps taken by the bank in order to determine whether Mr Sayed has established any breach of the duty owed.
While I accept that the determination of the cross-claim necessarily involves that contextual inquiry, it remains important to scrutinise the reason for the discrepancy between the higher valuations of the property and the price for which it was ultimately sold by the bank.
Mr Sayed relied in particular on Mr Lenord's desktop review, noting his citation of the initial valuation by Mr Gorrey at $1,430,000 and his remark that $110,000 per townhouse site was "not over the top".
As already noted, Mr Lenord qualified that remark by reference to the later discovery of the "issue with the remedial work", which he said "would have affected the overall project viability and value". Mr Sayed submitted that, had there been earlier full analysis of the complete history of the development approvals, it would have uncovered the "non-issue" with the remedial works and the development as a whole.
Mr Sayed submitted that the bank was aware of the watercourse DA from an early point in time (presumably because it was referred to on the face of the dual occupancy DA) and was given "the actual costs of the remedial works" in the letter sent by Mr Sayed's solicitor to Dibbs Barker at the time when Mr Sayed was seeking to sell lot 41 to Ms Stannard. In that letter, Mr Sayed proposed that $150,000 of the proceeds of sale would be paid to "the engineer contracted to complete creek works prescribed by development consent". Mr Sayed argued on that basis that the bank was on notice that the cost of the remedial works would be $150,000.
The fact that Mr Sayed nominated that figure does not by any means prove that was the likely cost of the remedial works.

Significance of the watercourse DA

Mr Sayed's case was based on two interrelated premises, neither of which was established, in my view. The first was that the existence of the watercourse DA added value to the property. Mr Sayed understood Mr Ellul's email describing that DA as "the key to the whole development" as an endorsement of his view on that issue. Mr Ellul disagreed. When it was put to him by Mr Sayed in cross-examination that the watercourse DA was an advantage for a developer, he said (Tcpt, 1 May 2018, p 163(19)): "A. It's not an advantage to the developer, no. When you market a property you have to give the purchasers all relevant information on the property and that DA that was missing from the original documentation that I received from Dibbs Barker was the key to the whole development, because when you purchase a development site, for argument's sake, you purchase it for half a million dollars. You spend half a million dollars on remediation of that site prior to being able to build, the site owes you a million bucks, it doesn't owe you 500,000. Q. What do you mean, remediation? A. Remediation: the creek, the bridge, the retention basin. That work has to be done for that development to proceed."
Mr Sayed asked whether Mr Ellul agreed that the property was worth more with that DA. He responded "No, definitely not. Worth less." He agreed that it costs money to obtain a development approval but maintained that the cost of actually carrying out the work required by the DA is a cost to the developer.
Mr Sloane and Mr Lenord also disagreed with the proposition that the watercourse DA added value to the property. Mr Lenord said (at par 24 of his affidavit): "I do not agree with the foregoing statement. The watercourse which affects the Subject Property is a physical constraint and the onerous conditions of development consent which are required to overcome or manage that constraint are unique to the Subject Property. This is a unique disadvantage which is suffered by the Subject Property and which is not suffered by the various 'Comparable' sale properties."
Mr Ellul presented as a difficult witness in some respects but his evidence on this issue was cogent and convincing, as was the evidence of Mr Lenord. In my view, based on their advice at the time, it was appropriate for the bank to regard the watercourse DA as a complication which operated to reduce the value of the property by the time the bank came to exercise its power of sale.
The second untested premise of Mr Sayed's claim was that the first Addisons valuation gave the proper value of the property. I have addressed the course of the valuations at length above. On the strength of that analysis, I am satisfied that the bank acted properly in testing the discrepancies in the information it was receiving concerning the value of the property and that it was entitled to proceed on the strength of the final Kohler Bird report. The first Addisons valuation and the first Kohler Bird valuation were each prepared in ignorance of the onerous obligations imposed by watercourse DA.
The bank relied on an expert report from a registered property valuer, Mr David Lunney. Mr Lunney was asked to provide a retrospective market valuation of the property as at 19 February 2010. He expressed the opinion that the actual sale of the property by public tender on 19 February 2010 represents the best evidence of value. He said: "The property was actively marketed for sale and the highest price the market was prepared to pay as at that date was the actual sale price of $545,454.54. The actual sale price is supported by an analysis of comparable sales, when appropriate consideration is given and adjustment made for variables between those sale properties and the subject property. The actual sale price is also supported by a hypothetical development calculation."
I have not relied on that report in my assessment as to whether the bank breached its fiduciary duty as mortgagee exercising a power of sale. However, the report establishes to my satisfaction that even if it had been established that the bank did breach its fiduciary duty, no loss is established.

Particulars of the cross-claim

Against that analysis, the individual particulars to paragraph 31 of the cross-claim can be addressed briefly.
Particular (a) asserts failure by the bank to advertise Corrimal properly prior to the sale. An aspect of Mr Sayed's case concerning that allegation was the appearance from the records that, for the first week of the four-week campaign, the advertisements may have referred to the sale as one by a mortgagee in possession. That is the inference I understood Mr Sayed to seek to have drawn from the apparent correction on 10 November 2009 concerning the permitted method of advertising. However, as submitted by Mr Lucarelli, an examination of the advertisements reveals that there was in fact no advertisement referring to a mortgagee in possession. Mr Lucarelli submitted that the correction on 10 November 2009 may have been a generic direction to MERC in respect of all securities being enforced at that time. There was no evidence to indicate whether that was the case but in any event I accept that there is no evidence to suggest that the property was in fact advertised as a sale by a mortgagee in possession at any time during the campaign.
Mr Lucarelli further submitted that, even if the advertisements had referred to the fact that it was a mortgagee sale, that would not be a breach of any duty of the mortgagee. He relied in that context on the decision of the Court of Appeal in Stockl v Rigura Pty Ltd (2004) BPR 23,151; [2004] NSWCA 73 at [43] and [46]. While that decision supports the submission, it is not necessary to consider this issue further having regard to the state of the evidence.
Separately, Mr Lucarelli submitted that the breadth of the advertising campaign was sufficient. Mr Ellul placed an advertisement in The Sydney Morning Herald and four advertisements in Real Estate World, a local magazine. In addition, the property was listed on websites (including realestate.com, realestateworld.com and mmj.com). The internet listings went up at the outset of the tender period on 2 November 2009 and remained live until the exchange of contracts.
I am not persuaded that there was any deficiency in the advertisement of the property prior to the sale.
Particular (b) alleges a failure on the part of the bank to obtain adequate valuations of the property and alternatively that the bank disregarded previous valuations it had obtained. For the reasons already explained, I am not satisfied that is the case. Mr Sayed's case on this issue fails to grapple with the critical significance of the requirement to undertake remedial works in respect of the watercourse.
Particular (c) complains of the decision to sell the property by tender rather than public auction "as recommended and approved". This issue may be considered together with particular (h), which complains of the bank instructing MMJ to market the property by tender "contrary to all previous recommendations by persons familiar with the market that auction was the preferred method".
The assertion that "all previous recommendations by persons familiar with the market" were to the effect that auction was the preferred method was not proved in the case.
Further, the assertion that public auction was the method of sale that had been "recommended and approved" is based on a misconception. That is not to criticise Mr Sayed. As already noted, the letter in which MERC set out its marketing recommendation for the property did recommend sale by public auction but also included a recommendation for sale by tender. Mr Matters explained that was due to a word processing error and that the recommendation for sale by auction was a standard inclusion in the letter which ought to have been deleted. A close consideration of the correspondence that followed reveals that the bank was not misled by the error. The correspondence makes plain that the bank understood the sale was proceeding by tender.
Mr Matters explained why he recommended sale by that method (affidavit par 37): "I formed the view because of the issues with the Property including the creek running through it and the fact that there were a number of integrated DAs attached to the Property. I was concerned that no one would make a bid at any auction and that the lack of interest at any auction would become public knowledge. The market was being described by both the valuers and local agents as subdued at that time and in my opinion eliciting blind offers from developers was the best way to maximise the price for the Property. At a public auction, an interested party usually has an opportunity to make several bids, but with a tender/expression of interest process, interested parties only get the one opportunity to put the best and highest bid. And NAB was not bound to accept any expression of interest received in response and could negotiate further if considered appropriate."
Mr Ellul also gave evidence on this issue. In his affidavit dated 20 June 2017, he said that he agreed with the proposal that the property should be sold by way of tender. His reasons for taking that view were that he was aware the property had been previously listed with a colleague and attracted little interest; that sale by auction does not always result in the "best and final offer" of the purchaser unless there are several interested parties; that the tender process operates like a blind auction and encourages bidders to put forward their best offer first and that using this method of sale means that the vendor is not bound to accept the highest bid.
Mr Ellul expanded on that evidence at the hearing. He said that, although it was initially anticipated that the property would be sold at auction, he formed the view that it was best to go through a tender process because it was a "problem site". He said (Tcpt, 1 May 2018, p 166(7)): "The people that could do that site, that would have the financial capacity and the know-how to do that site, would be very very few and far in between. Had it been an auction process at the end and we were left with these two gentlemen in the one room, I feel that it would have sold for a lot less than 545."
There was no evidence to suggest that sale by tender was an inappropriate method of sale. Rather, Mr Sayed's case rested on the appearance from the correspondence that sale by auction had been recommended by MERC and approved by the bank. I am not persuaded that there was any deficiency in the manner of sale.
Particular (d) alleges failure by the bank to have proper regard to the development approvals. The framing of this ground reflects Mr Sayed's assessment that the watercourse DA added value to the property even as late as 2009, even though none of the work had been undertaken at that time and the council sought the completion of the work as a pre-condition to the development of lots. For the reasons already explained, I do not accept Mr Sayed's analysis of that issue. I am not persuaded that this particular is made out.
Particular (e) alleges that the bank sold the property at a time when it had been advised that there was no activity by developers in the Wollongong area. This particular may be considered together with particular (f), which alleges failure to increase the marketing and advertising of the property to ensure that the few developers still active or those developers from outside the Wollongong area would become aware of the development opportunity.
As to the marketing and advertising of the property, for the reasons already explained, I am satisfied that there was adequate advertisement of the property, particularly having regard to the fact that it was advertised on the Internet which gives extensive reach into the market. As to the timing of the sale, the content of the bank's duty does not extend to requiring it to defer a sale until the market improves.
Particular (g) complains about the bank's "reducing the marketing budget below that which had been recommended by MMJ at a time when there had been an upturn in the demand for development sites, when the reduced activity of developers indicated a need for more extensive exposure and marketing to obtain a proper price." The assertion as to an upturn in the demand for development being the context in which MMJ had recommended the marketing budget was not established on the evidence. Nor was it established that there had been a reduction in the marketing budget. Mr Ellul explained that the actual expenditure on advertisement appeared to be less than the budget because a disbursement for one of the advertisements had evidently not been charged to the bank. In any event, whatever the budget was, for the reasons already explained, I am not persuaded that there was inadequate advertisement of the property.
Particular (i) complains that the bank placed the property with the agent who provided the lowest estimate of the price achievable and failed to instruct that agent to seek to sell the property within the range indicated by the independent valuations. This issue is addressed in the context of the discussion of the valuations and development approvals above.
Particular (j) complains that the bank failed to follow up or have the selling agent follow up the purchaser interest in lots 41 and 42 referred to in the letters from Mr Sayed's solicitor of 3 July and 25 September 2009. The dates appear to be wrong. I assume the reference to a letter dated 3 July 2009 was intended to refer to the letter to the bank from Mr Sayed's solicitor dated 14 July 2009, which put forward Ms Stannard's interest in purchasing lot 41 for $300,000. At first blush it may appear unfortunate that the bank rejected that offer. However, upon analysis, it was not a realistic option and it is unlikely to have proceeded, for the reasons already explained. Further, it is important to bear in mind that the offer made to the bank by Mr Sayed in effect sought the bank's agreement to waive its entitlement to enforce its security at that time, accepting "approximately $120,000 (less costs and expenses of sale)" only upon completion of the sale, which was conditional upon the council giving its consent to the dual occupancy (which Mr Sayed was to use "reasonable endeavours" to obtain within 6 months). It cannot be said that the bank's failure to take that offer further constitutes a breach of its duty as mortgagee in possession.
The reference to a letter dated 25 September 2009 is presumably a reference to the letter dated 15 September from Mr Taylor's solicitor to the bank stating that Mr Taylor had "a potential buyer for [lot 42] for $750,000". The letter was devoid of any detail for the bank to consider. If there was at that time a serious proposal to purchase the property at a price that would see the bank repaid in full, it could and should have been pursued by Mr Sayed in a manner that would enable the bank to give it proper consideration.
Particular (k) complains that the bank assumed the low appraisal of MMJ North (presumably a reference to Mr Ellull's appraisal) was to be preferred to the valuation of Kylie Ward without analysing and identifying the errors in the method used by MMJ for its estimate and significant discrepancy between the assumed sale prices of the completed townhouses for the Corrimal property and the prices obtained in fact for sales described as "recent sales of similar developments". The pleading noted that, in the case of the most directly comparable recent sales, the discrepancy was around $45,000 for a three bedroom townhouse with double garage.
This particular assumes that the bank ultimately approved the sale to the highest tenderer in reliance upon Mr Ellul's market appraisal of July 2009. As the discussion of the evidence above reveals, however, in fact the course the bank took was to consider the valuation of Kylie Ward against the information received subsequently (including information obtained only after close of the tender) concerning the need for remedial work to the watercourse.
Particular (l) alleges a failure to require MMJ North in accordance with its marketing recommendations to offer conjunctions to every other local agent and through the EAC network. The framing of the particular assumes that a listing with multiple agents in conjunction will be marketed more effectively than listing through a single agent. That is by no means self-evident and there was no evidence to establish that proposition. Although Mr Ellul was in some ways a difficult witness, displaying obvious hostility towards Mr Sayed and indeed a measure of disgruntlement with the process of being required to give evidence at all, a careful evaluation of his contemporaneous records suggests that he was a proactive agent applying some energy to securing the appropriate information to progress the sale. The principal difficulty with the sale was the state of the development at the time the bank came to enforce its security. Mr Sayed had obtained the watercourse DA in 2006 but had not completed those works (so far as the evidence reveals, no works had been commenced). No doubt he had expended significant funds and energy to reach the point he had reached. However, in the field of property development as anywhere, time is money. By the time the bank came to sell the property, more than three years had passed since the grant of the watercourse DA. The dual occupancy DA was dependent upon completion of the watercourse works. Those circumstances complicated the sale of the property in a way Mr Sayed has, in my assessment, never grappled with.
Particular (m) alleges a failure to monitor and review the marketing process through the marketing period and identify the obvious failure of the marketing approach used to expose the property to the market in such a way as to attract interest from likely purchasers of the property. Particular (n) complains of the bank's acceptance of a rejected tender bid and sale of the property following that marketing failure for a price which was "massively below the assessed and actual market value of the property". Each of those particulars, in my assessment, reflects a hindsight analysis of the correspondence undertaken on the assumption that the property was worth what Mr Sayed believes it was worth. For the reasons already considered in respect of earlier particulars, I would reject that analysis.

Conclusion

The evidence has not persuaded me that the bank breached its fiduciary duty as mortgagee in possession. It follows that the cross-claim must be dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 June 2019

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (12 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (7)

Cited By (3)