Nolan v MBF Investments Pty Ltd [2001] VSC 175

11. The former trustee of the trust is Merlow Nominees Pty Ltd (Merlow). By order of Warren, J. made 9 March 2001 Merlow has an equitable charge or lien over all the assets of the Prudent Trust, including the property, to the full extent of its entitlement to indemnity and exoneration.

14. By mortgage registered on 13 November 1998 the property was mortgaged by Nolan to MBF Investments Pty Ltd (MBF). There is a second mortgage to the Australia and New Zealand Banking Group Ltd (ANZ) which was registered on 11 July 2000.

17. As at 30 April 2001 the sum of $1,158,473.49 was owing to MBF pursuant to its mortgage. The interest payments in respect of that loan are in excess of $8,000 per month. Nolan has not made any payment of interest on the loan since 1 April 2000.

20. The amount said to be presently owing to ANZ is approximately $275,000.

23. In 2000 MBF filed a writ in the court whereby it sought an order for possession of the property. On 15 December 2000 and by consent of the parties, Master Evans ordered that MBF recover possession of the property.

26. Since November 1999 Nolan and his family have occupied the property despite the fact that in December 2000 MBF issued out of the court a warrant for possession of the property addressed to the Sheriff of the court.

29. MBF is now desirous of obtaining possession of the property and advertising it for sale by auction. The dispute between the parties relates to the manner in which that sale should take place.

32. In December 1998 an application was made by Nolan to the City of Boroondara for permission to subdivide the property into three allotments. The land on which the house occupied by Nolan and his family is erected would form lot 1; lots 2 and 3 would be vacant land. On 26 June 2000 the City of Boroondara issued the necessary permit.

35. At the present time it will cost approximately $125,000 to complete the works required to prepare the plan of subdivision. Completion of the subdivision will take about six weeks.

38. The surveyor presently attending to the matter, Peter James Mulcahy, has sworn in an affidavit of 15 May 2001 that his company is prepared to undertake the work on the basis that his company is paid from the proceeds of sale of the property after the repayment of MBF's mortgage. He has also agreed that in the meantime his company will forego any claim to interest on the sum.

41. The only further matter to note at this stage is that Collie claims an interest in the proceeds of the sale of the property to the extent of $586,254. It is unnecessary for present purposes to delve into the detail of that claim, save to say that a significant portion of it would appear to be quite valid.

44. The case for each of MBF, Collie and Nolan can be identified as follows:

1. MBF originally contended that it was not obliged to subdivide the property into three allotments but was entitled to possession of it, and to sell it by auction as it presently stands. However, during the course of the hearing before me its attitude changed and it became more flexible in the matter. I shall return to that aspect in due course.

2. Collie maintains that the subdivision should proceed and that the three allotments should be sold at auction on the same day, one after the other.

3. Nolan maintains that the property should be subdivided into the three allotments and that allotments 2 and 3 should then be sold at auction. He maintains that no sale of allotment 1 should take place because the funds produced by the sale of allotments 2 and 3 will be sufficient to discharge MBF's first mortgage, pay the subdivisional costs of $125,000 and either discharge or significantly reduce the amount outstanding under the second mortgage to the ANZ. As lot 1 will have a value of approximately $700,000 to $750,000, there will be sufficient equity in lot 1 to satisfy any enforceable claims Collie may have against Nolan pursuant to court orders in Collie's favour.

50. On 4 May 2001 Nolan filed a writ in the court naming MBF as defendant and by which he seeks (inter alia) the following relief:

A. An injunction both interlocutory and final restraining the defendant from selling the property described in Certificate of Title Volume 9473 Folio 608 other than as three separate lots as described in endorsed Plan of Subdivision issued by the City of Boroondara pursuant to Planning Permit Number BOR/98/01353.

B. An interlocutory injunction restraining the applicant from selling Lot 1 described in endorsed Plan of Subdivision issued by the City of Boroondara pursuant to Planning Permit Number BOR/98/01353 less than 30 days subsequent to the sale of Lots 2 and 3.

C. An injunction restraining the applicant prior to any sale of Lot 1 from enforcing its Warrant of Possession of the property described in Certificate of Title Volume 9473 Folio 608 or so much of that property as is described in Lot 1 of endorsed Plan of Subdivision issued by the City of Boroondara pursuant to Planning Permit Number BOR/98/01353.

56. I now have before me a summons filed in the court whereby Nolan seeks similar relief.

59. There is no doubt but that a mortgagee when selling mortgaged property owes a duty to the mortgagor to act in good faith having regard to the interests of the mortgagor. In certain circumstances the duty may even extend to requiring a mortgagee to advance further funds. That latter aspect was dealt with in some detail by Isaacs, J. (as he then was) in Pendlebury v. Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 C.L.R. 676. At p.701 His Honour said:

" Two extreme views may be mentioned to be put aside. To say that so long as he exercises his power with the real object of getting his debt paid he is absolved, is too low a standard of responsibility, because that loses sight of his obligation to deal fairly with the mortgagor's residual property. On the other hand, to make him answerable for mere carelessness in realization, however anxious to act fairly by the mortgagor, is placing the standard too high, and would not only be cutting across principles, but would become a serious impediment to, and, by recoil, impose a heavy burden upon, needy borrowers. The mortgagee, when the permitted time arrives, is not bound to wait for his money, merely because the mortgagor might profit by delay. And as ex hypothesi he is engaged in a lawful endeavour to get back money which is overdue, he cannot be expected to further increase the advances of the mortgagor by expending further sums for his sole possible benefit, in the shape of a higher surplus price. A prudent owner might well risk considerable outlay in order to secure a possibly enhanced return. But the mortgagee is not called upon to do this, without express stipulation to that effect. He would get no advantage from the outlay beyond the amount of his debt, and he might end in increasing that. But if a further outlay is in the circumstances reasonable, and apparently necessary and prudent to conserve the mortgagor's interest, and to prevent his residual property being sacrificed, and if, having regard to what a cautious man would consider the total selling value of the property, it is manifestly safe, the mortgagee is, in my opinion, not justified in refusing to make or incur it merely because he can get enough for himself without it. It must, however, be safe; if it is not, the mortgagee would be taking risks for the benefit of the mortgagor which he is not called upon to do; if it is, he is merely using part of the mortgagor's own property to preserve the rest. Neglect in such circumstances would be manifestly improvident and would afford cogent evidence upon which a tribunal would be at liberty to think, and probably would think, the neglect reckless or wilful. It would be so grossly unfair to the mortgagor who is unable to protect himself that the Court would find it difficult to resist the conclusion that the mortgagee had no intention of observing Lord Lindley's rule in the British Equitable Case already quoted. By 'recklessness' then, I understand a disregard of the mortgagor's interest, ignoring his property in the possible surplus, in short, not caring whether its fair and proper value was obtained or not, as distinguished from the mere want of care or prudence in the course of honestly trying to conserve it. The first is not compatible with good faith in enforcing the power of sale; the second is entirely consistent with good faith in carrying out its purpose, though lacking in skill or attention. The question in the present case is whether the evidence shows a reckless disregard by the respondents of the appellant's interest as mortgagor."

63. It is agreed by all parties that if the property was subdivided into three allotments, each allotment then being sold separately, the overall proceeds of the three sales would exceed the amount recovered in the event that the property was sold as it is. Estimates vary as to the extent of such variation. On one view of the matter it could be as much as $200,000. Quite obviously if that proved to be the case, that is a not insignificant sum. One's immediate reaction is to say that in that situation the land should be subdivided into the three allotments before it is sold.

66. However, to this time it has not been possible for MBF to do anything in that regard even if it wished to. I say that for the reason that before a proposal to subdivide can go beyond the stage when the relevant municipal authority has issued a permit to that effect, the owner of the land to be subdivided must sign what is known as a Section 173 agreement.

69. The section referred to is part of the Planning and Environment Act 1987. Sub-s.(1) of that section provides that a responsible authority (in this instance the City of Boroondara) may enter into an agreement with the owner of land in the area covered by a planning scheme for which it is a responsible authority.

"(1) An agreement must be under seal and must bind the owner to the covenants specified in the agreement. (2) An agreement may provide for any one or more of the following matters - (a) the prohibition, restriction or regulation of the use or development of the land; (b) the conditions subject to which the land may be used or developed for specified purposes; (c) any matter intended to achieve or advance - (i) the objectives of planning in Victoria; or (ii) the objectives of the planning scheme or any amendment to the planning scheme of which notice has been given under section 19; (d) any matter extendable to any one or more of the above matters."

76. Before the City of Boroondara will seal any plan of subdivision in respect of the property the subject of this litigation, it requires Nolan to enter into the appropriate agreement.

79. However, if Nolan did so he would immediately breach paragraph 7 of the Orders of Warren, J. of 9 March 2001, which reads:

"7. Until further order the second-named defendant (Nolan) is restrained from dealing with or disposing of any of the assets or property of the Prudent Trust, or taking any action whatsoever as trustee of the Prudent Trust." (The emphasis is mine.)

83. During the course of discussion counsel for MBF informed me that if I vary paragraph 7 of Warren, J.'s order to enable Nolan to execute the necessary Sec.173 agreement, MBF will then take appropriate steps to subdivide the property into the three allotments, then sell by auction such of the allotments as are necessary to pay out its mortgage. Of course MBF will require any costs incurred by it in doing so to be repaid to it, and will also require such co-operation from Nolan as is necessary to subdivide the property.

86. As I intend to vary the order of Warren, J. to enable Nolan to sign a Sec.173 agreement, in my opinion there is no basis for the grant of any of the injunctive relief sought by Nolan in his writ and summons.

89. It is not for this court to direct a mortgagee as to whether it should sell the three allotments on the one day. As to whether that is done or allotments 2 and 3 are offered for sale on the same day with allotment 1 being offered for sale on a later date, assuming of course that it becomes necessary to do so to discharge MBF's mortgage, is a matter for MBF to determine.

92. In making such a determination MBF will be expected to obtain appropriate advice from an experienced real estate agent and then, unless there is very good reason not to do so, to act upon that advice.

95. Nor is there any sound basis for staying the execution of the warrant for possession. Nolan consented to the order being made against him and must now bear the consequences.

98. During the course of the hearing before me there was much debate as to whether I should make orders in favour of Collie the effect of which would be to require MBF to pay to Collie the amount awarded to him by Byrne, J. in his judgment in proceeding No.6265 of 1991 and further sums to cover the costs awarded in his favour by Byrne, J. and the costs awarded to him by Warren, J. on 9 March 2001, neither of which have as yet been taxed.

101. In my opinion it would be inappropriate for me to make any such orders. Those matters do not concern MBF. Collie has his judgments and should execute them in the appropriate fashion.

1. In proceeding No.5565 of 2000 I order that paragraph 6 of the order of Warren, J. made 9 March 2001 be varied so that the paragraph reads:

"6. Save that the Secondnamed Defendant is permitted as mortgagor to sign the agreement under s.173 of the Planning and Environment Act 1987 (Vic) between Boroondara City Council and himself entered into pursuant to Planning Permit No. BOR/98/01353, until further order, the Secondnamed Defendant is otherwise restrained from dealing with or disposing of any of the assets or property of the Prudent Trust, or taking any action whatsoever as trustee of the Prudent Trust."

2. I make no order as to the costs of the second defendant's summons filed in that proceeding on 4 May 2001.

3. I order that the plaintiff's summons filed in proceeding No.5653 of 2001 on 4 May 2001 be dismissed.

4. I order that the plaintiff pay the defendant MBF Investments Pty Ltd's costs of the said summons including the costs of 15 May 2001 and any reserved costs.

5. I order that the plaintiff pay the costs of Geoffrey Malcolm Collie of the said summons but excluding the costs of the day of 15 May 2001.

6. I order that the plaintiff pay the costs of the summons of the liquidator of Merlow Nonminees Pty Ltd excluding his costs of 15 May 2001.

115. HIS HONOUR: I propose to think about the matter overnight and I will announce my ruling as to costs at 10.30. I excuse counsel from attending. It will be recorded and it will be available with my reasons when they are transcribed.

118. I will note the undertaking given on behalf of Mr Nolan that he will sign the appropriate Sec.173 agreement when requested to do so by the solicitors for MBF.

122. HIS HONOUR: Overnight I have reconsidered the question as to the appropriate costs orders to be made in respect of the two applications before me.

125. Having done so I consider that Collie is entitled to his costs of the applications in the proceeding in which he is plaintiff.

128. The permit to subdivide the property was issued by the City of Boroondara on 26 June 2000.

131. The order of Warren, J. restraining Nolan from taking any action as trustee of the Prudent Trust was made on 9 March 2001. In my opinion application should have been made to Warren, J. at that time to couch the order in terms which would have permitted Nolan to sign an appropriate Sec.173 agreement.

134. For that reason his present application should never have become necessary - nor, in view of the attitude adopted by Collie as conveyed to Nolan by Collie's solicitors, should it ever have become necessary for Collie to incur further legal expenditure in relation to the matter. However, by virtue of Nolan's attitude and behaviour in the matter that did become necessary.

137. In substitution for order No.2 I pronounced yesterday, I order that Nolan pay Collie's costs of the summons filed in proceeding No.5653 of 2001 including the costs of 15 May 2001 on an indemnity basis.

146. Order 6, which now becomes order No.5, is amended so that it now reads:

5. I order that the plaintiff pay the costs of the summons of the liquidator of Merlow Nominees Pty Ltd excluding the costs of the day of 15 May 2001.

150. I do not propose to grant any stay of the warrant.