Provident Capital Limited v John Virtue Pty Ltd [2012] NSWSC 319 | Case summary

What happened

Provident Capital sought damages for an alleged negligent valuation carried out by John Virtue Pty Ltd and the valuer Grant Phillips in December 2004 for a former industrial site at 2–4 Coulson Street, Erskineville. The defendants' December 2004 valuation assessed a site value with development consent (104 apartments) at $12,000,000 exclusive of GST (see [1], [43]). Provident, a non‑conforming asset lender, advanced $7.92M (66% of the valuation) on 2 March 2005 and later advanced an additional $1M under a separate limited guarantee (see [55]–[56], [57]). The borrower defaulted; Provident obtained a second valuation from Mr Phillips in October 2005 that placed a normal sale value at $7M and a forced sale value at $6.25M (see [63]–[64], [146]). Provident alleged negligence, TPA and Fair Trading Act contraventions, and sought loss of opportunity and other damages. Harrison AsJ held for the defendants, finding that (i) the first valuation was not negligent, (ii) Provident's reliance was unreasonable because the valuation was expressly conditional on confirmation of presales and Provident knew many presales involved trade dollars, and (iii) causation was not established; judgment entered for defendants with costs (see [233]–[236]).

Why the court decided this way

Content and scope of duty: The judge began from settled principles: a valuer owes a duty of care to a lender who will rely on the valuation; the content of that duty is informed by the instructions and the circumstances (see [81]–[87], citing Kenny & Good and related authorities). The Court therefore assessed whether Mr Phillips acted with reasonable care and skill in light of his instructions (see [149]–[156]).
Valuation methodology: Mr Phillips adopted a residual site feasibility (cashflow) method because he judged that comparable site sales within a reliable 12‑month window were insufficient or unreliable in the local market (see [45], [89], [121]–[131]). Expert evidence split on primacy of methods: Mr Davis emphasised comparative sales as primary, with feasibility as a check (valuing the site at about $8M); Mr Rowlands (and Mr Phillips) regarded feasibility analysis as appropriate for a site with development approval and presales, and supported the $12M figure or a close bracket (see [93]–[104], [100]–[101]). The judge preferred Rowlands' evidence, noting his local experience (see [121], [106]–[107], [120]–[121]).
Assessing negligence: The Court accepted that valuation permits differences of professional judgment, valuation is 'an art not a science', and that valuation figures within a certain bracket (commonly cited 10‑15%) are prima facie not negligent (see [82]–[86], [157]). Having considered the alleged shortcomings (comparative analysis, searches, unit pricing, construction costs, presales assumptions, and use of only one method), the judge found the criticisms were not made out and that Mr Phillips' approach was reasonable in the circumstances (see [88]–[91], [129]–[141], [153]–[158]).
Reliance and verification of assumptions: Critical to the outcome was the express qualification in the 2 December 2004 report that the valuation was subject to confirmation that the pre‑sales were bona fide (see [43], [154]–[156], [177]). Provident was warned internally of market slowdown and the valuer's caveat; Provident instructed solicitors to confirm presales but nonetheless proceeded, and internal notes show awareness that many presales involved 'trade dollars' (see [47], [190]–[196]). The judge concluded the lender's reliance on the valuation was unreasonable in those circumstances (see [196], [233]).
Causation and loss: Even if the valuation had been negligent, Provident failed to establish causation, namely that it was deprived of alternative lending opportunities because funds were not available (see [159], [216]–[219]). The Court noted Provident had cash on hand and reporting that it would in any event have had to show that it rejected alternative applications because of the subject loan; the defendants pointed to the cash position and the impossibility of showing such deprivation (see [216]–[219]). The Court therefore concluded Provident had not established loss caused by defendants (see [163], [233]).

Before and after state of the law

Before this decision, the relevant legal landscape comprised established High Court and appellate authorities on valuer duty and professional negligence (Kenny & Good; Hann Nominees; Adwell) and authorities on assessing lost commercial opportunities (Sellars; Tabet). Those cases laid down these controlling propositions:

Duty and content are shaped by the valuer's instructions and the closeness of reliance (Kenny & Good) (see [82]–[83]).
A valuation outside a reasonable range can be evidence of negligence, but differences of professional judgment are tolerable (Hann Nominees; Adwell) (see [84]–[86]).
Lost opportunities may be compensated by reference to probabilities (Sellars; Tabet) (see [209]–[211]).

Provident Capital v John Virtue (No 2) applies those doctrines to a fact pattern where the valuer expressly conditioned valuation on presales. The decision clarifies:

A valuer's well‑documented use of a residual feasibility method can be appropriate where comparables are unreliable and the site has DA and presales (see [129]–[141], [153]–[158]).
A lender's duty to verify key assumptions identified by the valuer is critical: if the valuer warns that an assumption (eg bona fides of presales) is material, unreasonable reliance by the lender without verification will defeat a negligence claim (see [173]–[196], [233]).
A later, lower valuation produced on different instructions and market conditions is not, by itself, proof of negligence in the earlier valuation (see [142]–[148]).

Thus the decision sits comfortably within pre‑existing authority but emphasises the shared responsibility: valuers must make clear critical assumptions; lenders must verify those assumptions before relying on the valuation.

Key passages with plain-English translation

Quotation: "Given the lack of appropriate site sales evidence ... we have addressed the Site Value ... upon the basis of a residual site feasibility ... Cash Flow Analysis." (Report, cited at [89]) Plain English: The valuer said there were not enough recent comparable sales, so he valued the land by modelling the development's likely revenues and costs rather than by direct sale comparisons.
Quotation: "The valuer made it abundantly clear to Provident Capital that it was important to check the presales were bona fide and that the bona fides of the sales affected the valuation figure." ([193]) Plain English: The valuation explicitly warned the lender that the price depended on whether the purported pre‑sales were real, and the lender needed to confirm that.
Quotation: "A valuer is entitled to exercise his professional judgment ... 'an art not a science'." ([157]) Plain English: Courts will allow room for differences between competent valuers; arriving at a different number does not automatically mean a valuer was careless.
Quotation: "In summary, my conclusions are that the defendants did not breach their duty of care ... Provident Capital's reliance ... was unreasonable." ([233]) Plain English: The judge concluded the valuers acted properly, and even if there had been an error, Provident's failure to check important assumptions meant it could not recover.

What fact patterns trigger this precedent

A valuer prepares a valuation for a lender where the asset is a development site with DA and asserted presales, and comparable market sales are thin or older than a sensible cutoff; the valuer elects a residual feasibility method and expressly conditions the valuation on the presales' bona fides (see [43], [89], [153]).
A lender, aware of the valuer's caveat and with internal notes showing many presales are in 'trade dollars' (or otherwise suspect), proceeds to advance funds and does not satisfactorily verify the presales (see [190]–[196]).
A later market movement produces a substantially lower valuation after lender default; plaintiff seeks to rely on the discrepancy to prove the earlier valuation negligent (see [142]–[148]).

In those circumstances, Provident Capital v John Virtue shows courts will:

Uphold the valuer's methodological choice if reasonable in context;
Take seriously a valuer's explicit caveats and expect lenders to verify them;
Reject negligence claims where lender's own commercial decisions and lack of verification break the chain of causation.

How later courts have treated it

The judgment itself cites and applies established authorities (Kenny & Good, Hann Nominees, Adwell) and references La Trobe for assessment of lost opportunity damages methodology (see [82]–[86], [211]). Subsequent courts considering professional valuer liability and lender reliance should treat this decision as a persuasive NSW Supreme Court authority emphasising two practical propositions:

The appropriateness of residual feasibility as a primary method for DA sites with presales when comparables are unreliable (see [100]–[104], [129]–[131]).
The necessity for lenders to verify material assumptions identified by valuers; where a valuer flags a critical assumption the lender cannot uncritically rely and then complain (see [173]–[196], [233]).

Practitioners should expect later courts to scrutinise both the valuer's methodology and the lender's conduct; this decision supplies a template for assessing the interplay of those factors.

Still-open questions

Degree of verification required: The judgment finds Provident's reliance unreasonable because it proceeded despite awareness that many presales were 'trade dollars' and despite solicitor enquiries; however the precise level of verification a lender must undertake when a valuer flags presales as critical remains fact‑dependent. What documentary standard (eg solicitor confirmations, trust account receipts) suffices will depend on context (see [190]–[196]).
Temporal cut-off for comparables: Mr Phillips used a 12‑month cutoff and the experts used up to 15 months. The judgment accepts that comparables older than 12 months can be unreliable (see [126], [129]–[131]), but it leaves open exact temporal rules; tribunals will continue to assess reliability by reference to market movement and locality rather than a strict temporal rule.
Role of lender business model: The Court noted non‑bank lenders' different practices (asset lends, less emphasis on serviceability) (see [171]–[173]), but did not categorically determine what adaptation that model requires in verification duties; future cases may delineate how lender business models affect the standard of reasonable investigation.
Quantification of lost opportunities: The judge applied a pragmatic 50% chance when hypothetically assessing foregone income (see [219]). Future courts will continue to grapple with probabilistic valuation of lost lending opportunities and the appropriate evidentiary foundation required.
Admissibility/value of later valuations: The judgment treats a subsequent valuation produced on different instructions and in changed market conditions as not dispositive of negligence at the earlier date (see [142]–[148]). The precise weight to be attached to post‑event valuations remains a matter for judicial assessment; courts will continue to require careful analysis of changed instructions and market context before inferring prior overvaluation.

Practitioners and compliance teams should take from Provident Capital v John Virtue (No 2) the practical lessons to (i) ensure valuers identify assumptions clearly, (ii) require lenders to verify any material caveated facts (particularly presales), and (iii) document the verification and decision‑making process carefully to protect against later negligence claims.

Judgment (47 paragraphs)

[1]

Judgment 1HER HONOUR: The plaintiff seeks damages for what it contends was a negligent valuation carried out by the defendants in December 2004 in relation to a former industrial site at Erskineville ("the property"). In December 2004, the defendants valued the property at $12M. The plaintiff seeks damages for breach of contract, damages in tort, damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) ("the TPA") and/or s 68 of the Fair Trading Act 1987 and interest. 2The plaintiff is Provident Capital Limited ACN 082 735 573 ("Provident Capital"). The first defendant is John Virtue Pty Ltd ACN 001 656 195 ("John Virtue"), a firm of property valuers. The second defendant is Grant Phillips, who is a valuer employed by John Virtue ("Mr Phillips"). Mr Phillips is the one who prepared and signed two valuations. At the time of the valuations (2/12/2004; 16/102005) and as at the current date Mr Phillips was a director of John Virtue. 3Provident Capital is a non-conforming lender, that is, it does not conform to the lending criteria that would govern traditional lenders such as banks. Provident Capital is also a mortgagee, which is in the business of lending on the security of registered mortgages over real property. Mr Michael O'Sullivan ("Mr O'Sullivan") is the managing director of Provident Capital. He gave evidence on its behalf. He has 20 years' experience in finance and investment and has been with Provident Capital Group since its inception in 1990. 4John Virtue is a company that is in the business of providing valuation services to lenders in relation to loan to be secured on mortgages over residential properties. 5I shall firstly give a broad outline of the allegations raised in the pleadings followed by the background facts. Then I will consider the five main issues for determination in seriatim. They are:

Negligence - whether the valuation was negligent, in the sense that it did not accord with what a reasonable and competent valuation of the property at the time would have been;
Causation - whether the valuation, assuming it was negligent, caused the plaintiff's loss;
Reliance - whether Provident Capital relied on the valuation of the property;
Damages - if breach, causation and reasonable reliance are proved, whether Provident Capital is entitled to recover loss of opportunity damages, being the interest and other fees Provident Capital claims it would have made had it been able to lend the moneys to other borrowers, and, if so, what this amount is;
Contributory negligence - whether and to what extent the plaintiff contributed to its own loss, and what, if any, is the relevance of the evidence about reasonable lending practices. 6The defendants deny liability in respect of the valuation; deny breach and/or contravention of the TPA; and deny causation and reasonable reliance. 7The defendants submitted that even if this Court makes findings against them on the above issues, when assessing any entitlement to damages this Court should conclude that Provident Capital has suffered no loss because there was no actual loss to Provident Capital on the subject transaction. Further, to demonstrate loss, Provident Capital must show that because it entered into the subject loan transaction it was deprived of the opportunity to lend to another borrower due to insufficient funds. In order to succeed on this allegation, the defendants say that Provident Capital must show that it rejected alternative loan applications because of insufficient funds being available as a consequence of the subject transaction, and it has not done so. 8When the borrower MMT Investment Services Pty Ltd ("MMT") defaulted, a further valuation was obtained from Mr Phillips in October 2005, which valued the property as being worth between $6.25M and $7M. Provident Capital submits that this is enough to substantiate a finding of negligence. The defendants say that this second valuation is of no relevance to the issues for consideration by the Court. The defendants submitted that there is no relevant inconsistency between the two reports and as such no adverse inference can be drawn against the defendants' interests.

[2]

Background facts and history of the loan 9In late 2004, Toubia Constructions Pty Ltd ("Toubia") sought loan funds from Provident Capital for the purposes of completing the purchase of the property at 2-4 Coulson Street, Erskineville. Toubia had negotiated a purchase price for the property of $13.52M, the vendor being Herro Trading Corporation Pty Ltd ("Herro"), with a deposit of $1.352M having been paid by Toubia. To complete the purchase Toubia needed a further $12.168M. 10The property had development approval for, firstly, the demolition of existing buildings; and secondly, the construction of 103 residential units and one commercial unit. 11The loan application made on behalf of Toubia to Provident Capital did not include the provision of funds for demolition of existing buildings, nor for the construction of the proposed development. 12The purpose of the loan was to advance funds sufficient to allow Toubia to settle on their purchase of the property in March 2003. In late 2004, Toubia approached Provident Capital through its broker Karen Gold ("Ms Gold") of Capital Now, to obtain bridging finance for the property. Ms Gold submitted the application on behalf of Toubia. 13The amount of the loan was to be for the lesser of either $10.860M or 66 percent of the valuation of the property. During consideration of the proposed loan, Provident Capital retained the defendants to provide the valuation. As previously stated, the valuation was undertaken by Mr Phillips on behalf of John Virtue who assessed the site value of the property, with development consent, at $12M exclusive of GST as at 2 December 2004. The proposed loan to Toubia did not proceed.

[3]

The change of borrower from Toubia to MMT 14In early February 2005, Provident Capital was notified that the proposed borrower would no longer be Toubia, but rather a company known as MMT. 15By the time that MMT had been put forward as the proposed borrower, Toubia's proposed purchase of the property had fallen through and MMT had negotiated a purchase price at $10,765,500. Herro remained the vendor. 16A new contract for sale of the property was drafted with MMT as the purchaser. There was no deposit required in the new contract for sale, as there was to be a simultaneous exchange and settlement. The purchase price of $10,765,500 took into account the deposit already received and retained by Herro and included further consideration in kind of an assignment to Herro of nine exchanged contracts for off the plan units to be constructed as the security units. 17Provident Capital agreed to advance $8.920M to MMT ("the loan") and took collateral including a first registered mortgage over the property and obtained guarantees from Michael Toubia, Monica Toubia, Toubia and Capital Access Holdings Pty Ltd ("Capital Access") ("the mezzanine lender"). Michael Toubia was the sole director of Toubia and Monica Toubia, Michael Toubia's wife, was the sole director of MMT. 18As discussed above, the property had development approval for the demolition of existing buildings and the construction of 103 residential units and one commercial unit. 19On 8 November 2004, Karen Gold wrote to Stan Roots, an employee of Provident Capital, informing him that he had: "... a client which will require a (sic) asset lend to settle on land which he exchanged on 18 months ago. In the 18 months he had pre-sold 20.9 million in apartments and completed DA. He is going to require a 20 million construction loan on a 52 million gross realization would you be interested in the construction once I put the deal together." 20Emails were exchanged. Further information was provided in relation to the site. Ms Gold indicated that the first step was "the asset lend" and then to move onto the construction loan. Mr Roots informed Ms Gold that Provident Capital would not be interested in the construction facility; it was interested in settling the land component only. The basic conditions were outlined as follows: "1. Maximum LVR 66% of current value 2. Application/establishment fee 2.95% of loan amount - client to pay $15,000 plus valuation and $5,000 towards legals on acceptance of offer 3. Would want evidence of stated pee (sic) sales and our offer would include that they can't rescind/cancel contracts 4. Interest would state accruing 5 days from date our Solicitors provide documentation to borrowers Solicitors 5. Interest rate 11.25% payable 6 monthly in advance (term of loan) with no rebate if paid out early" 21The next day (9 November 2004), Ms Gold forwarded documents to Mr Roots by fax. They were: the signed Provident Capital offer; the Capital Now Mandate; Konstan Lawyers letters in regards to pre-sales; exchanged contracts; a letter from Speedy Gantry Hire "with satisfied result"; an explanation as to why the client had a CRAA default; a unit list outlining buyers and deposits; a completed project list; a purchase contract dated March 2003; and a general summary letter. 22By letter dated 9 November 2004, Capital Now wrote to Provident Capital explaining CRAA defaults due to the following unpaid building work performed: "Job 1: XX Presidents Drive Caringbah NSW ... Project cost: $7.2 million. Project Manager made a miscalculation and the cost was under quoted by over a million. Loss 2 million Job 2: Diamond Bay Rd Vaucluse ... Toubia was written a cheque for 1 million which bounced from the funder: Copies of cheque available. Loss 1 million Job 3: XX George Street Liverpool...Developer Aus Constructions (Mr Sam Masri) went into receivership. Loss $370,000" 23On 10 November 2004, Provident Capital replied by stating that the offer provided was the formal offer and that they had no objections to a second mortgage and would provide consent etc when further details were received. It noted that the borrowers already had an offer from St George Bank. 24The application for mortgage finance stated that the loan applicants were Michael Toubia and Toubia. 25A statement of income and expenses/assets and liabilities showed: Assets Value Liabilities Monthly Amount Repayments Owing Real Estate (Property Address) (see attached)

[4]

(italics denotes handwriting) 26Borrower/guarantor declarations were answered "yes" to the following questions: "Have you, or your spouse, ever been shareholders or officers of any company of which a manager, receiver and/or liquidator has been appointed or have there been any unsatisfied judgements entered against such company? Have you or will you be borrowing additional funds to complete the proposed purchase or development of the mortgaged property? If yes, give details." 27In addition it stated: "Yes for second mortgage by Capital Now by private investors." 28By letter dated 9 November 2004, Ms Gold wrote a letter titled "Re: General overview". It relevantly stated: " ... 3. I will be putting a 2nd mortgage behind loan and will need a letter of consent I will supply details when we are at this stage 4. Client does have a Letter of Offer for construction facility for 26 million from St George (which I have) and paid a broker 20,000 to get valuation with Lansbury's for St George (this is what the client was told). However we are trying to see if this money and valuation has been ordered, if it hasn't we will have work through it to take St George offer if the valuation fees haven't been correctly placed (Currently the broker has asked for more upfront fees and the valuer hasn't contacted client directly) or alternatively I will place him somewhere else for construction as the pre-sales are in place. ..."

[5]

Provident Capital's letter of offer to Toubia dated 9 November 2004 29Provident Capital offered the loan funding on the following terms: Borrower Name Toubia Constructions Pty Ltd A.C.N. 082 890 328

[6]

Registered Address XX Murray Street Merrylands NSW 2160

[7]

Guarantor Name Michael Toubia Address XX Murray Street Merrylands NSW 2160

[8]

Loan Amount $10,890,000.00 or 66% of valuation, whichever is the lesser

[9]

Loan Repayment The loan is for the period for 6 months from the day the loan is settled. The loan must be repaid at the end of this period.

[10]

In the event of early discharge there will be no rebate of pre paid interest.

[11]

Interest Interest will be calculated at 17.25% per annum (the higher rate) reducing to 11.15% per annum (the lower rate) for each interest payment received by the due date. Interest will be calculated on the loan amount and any additional money which is payable to us in connection with this loan facility.

[12]

Security The security for the loan will be:

[13]

First registered mortgage over XX Coulson Street Erskineville; Company charge over all the assets of Toubia Constructions Pty A.C.N. 082 890 328; Guarantee by guarantors.

[14]

Purpose Assist with the purchase of XX Coulson Street Erskineville NSW

[15]

Satisfactory evidence of at least $18,000,000 worth of presales on unconditional contracts with a minimum of 10% deposit. Contracts are to be found to be acceptable to use and our solicitor. The borrower and their solicitor shall not

[16]

(i)release a buyer from a contract for sale without our written consent (ii)Vary the terms of a contract for sale without or written consent. (iii)Release a deposit to a buyer under a contract for sale without our written consent.

[17]

2.... 3.... 4.... 5.... 6.... 7.... 8.If you are unable to discharge this loan on or before the due date, or no arrangements have been made before the due date, to extend, vary or rollover the loan, then we may, at our discretion, rollover the loan for a further period of up to 90 days. During this period interest payments will be due at the higher rate with no discount for timely payment. In addition a rollover fee equivalent to the establishment fee levied on settlement of this loan will be charged to your account on the date of the original maturity."

[18]

30The loan offer was also subject to the following conditions:

satisfactory credit reference reports on the borrower;
a satisfactory application form;
evidence on the petition by Speedy Gantry Hire having been withdrawn or satisfied;
a copy of all the relevant pages on the contract to purchase setting out the purchase details;
assignment of the copyright of approved building plans, specifications, building contract and working drawings;
satisfactory evidence of at least $18M worth of presales on unconditional contracts with the minimum of 10 percent deposit; and
that each presale was unconditional and irrevocable by either the borrower or borrower's solicitor. 31The loan to MMT was a short-term asset lend in the form of a bridging finance facility for six months with prepaid interest built in to the loan advance. The most important enquiries as far as Provident Capital was concerned were the valuation of the property in its then existing condition to ensure that the loan could be recouped upon the sale of the security and the certification by its solicitors that it would receive good title to the mortgage security property upon completion.

[19]

Instructions and first valuation of the property dated 2 December 2004 32On 22 November 2004, Provident Capital wrote to John Virtue as follows: "John RE: XX COULSON STREET ERSKINEVILLE NSW The above property as a DA for 103 units, 1 commercial and associated party etc Clients state that the current value is between $16.5 million and $18.5 million It would be appreciated if you could advise whether or not you are in a position to undertake a valuation of this property and if so what your fees would be Please note that we would need the valuation completed within 2 weeks of you having received instructions Accordingly we await your advices ..." 33On 22 November 2004, Provident Capital wrote to John Virtue as follows: "Dear John Re: XX Coulson Street Erskineville NSW Would you kindly arrange for an independent valuation of the following property to be carried out at your earliest convenience. Details are as follows:- Name of Borrower: Toubia Constructions Pty Ltd Address of Property to be Valued: XX Coulson Street Erskineville NSW Title Particulars: Lot 1 DP XXXX and Lot 2 DP XXXX (Copy of front page of contract as follows) Name of person to Arrange Access: Michael Toubia Telephone Number: xxxx xxx xxx When preparing your report you must include comment on the following matters:

Comparable sales in the area;
If the property is being purchased, how long was it on the market;
Sales ability and marketability of the security together with confirmation that the property is readily saleable at your valuation figure within a 6 month period assuming an appropriate sale and marketing campaign;
Suitability, in general terms, as security for a mortgage loan;
Value of land as distinct from improvements;
Assessment of current market rental; and
Whether or not the property being valued is or may be affected by any environmental issues, or is or may be subject (either now or at some future date) to any of the provisions of environmental legislation.
An estimated amount for replaced and reinstatement insurance including allowance for professional fees, anticipated costs, movements and removal of debris. Would you also note in your report whether any work, repair, renovation or improvement is to be undertaken, and if so, your assessment of:
The extent of the work;

[20]

Relevant parts of the first valuation dated 2 December 2004 43I have reproduced the relevant parts of the valuation and have added emphasis (in bold) to the portions of the report that are controversial. "INSTRUCTED BY Mr Stan Roots, Manager - Mortgage Lending, Provident Capital Limited, Level 42, Tower Building, Australia Square, 264-268 George Street, Sydney, New South Wales, 2000. YOUR CLIENT Toubia Constructions Pty Ltd. PURPOSE OF VALUATION Mortgage arrangements. DISCLAIMER ... In summary, this valuation report is for the use of and may be relied upon only by the parties to whom it is addressed. No other party is entitled to use or rely upon it without our specific written consent and the valuer shall have no liability to any party who does so. ... DEFINITION OF MARKET VALUE This valuation has been prepared on the basis of market value as defined by the Australian Property institute - "Market value is the estimated amount for which an asset should exchange at the date of valuation between a willing buyer and willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion." PRECISE INSTRUCTIONS We are instructed to supply a Site Value with Development Consent in place for a project of one hundred and four (104) apartments. ... REGISTERED PROPRIETOR Title Search records indicate that the subject lots are both held in the ownership of Herro Trading Corporation Pty Limited. LAND DIMENSIONS The relevant draft Strata Plan indicates that the subject land, in consolidation, has a front boundary measurement of 99.985 metres, an irregular rear boundary measurement (subject to a splay corner) of 37.945 metres, an irregular east side boundary measurement of 91.34 metres and an irregular west side boundary measurement of' 109.52 metres (we note that dimensions on the Deposited Plans are indecipherable). Valuation of the Residential Redevelopment Site at Numbers XX Coulson Street, Erskineville, New South Wales, 2043 LAND AREA The relevant Deposited Plans indicates that the subject land, in consolidation, has an area of 4,869 square metres. ... DEVELOPMENT CONSENT Conditional Development Consent was granted (for five years) in respect of the subject property, per DA No. XXX-00757, on 17thOctober, 2001, for the demolition of existing industrial buildings, the erection of a six (6) storey residential flat buildings over two (2) basement carparking levels. ... SITUATION AND SERVICES The subject property is located upon the southern side of Coulson Street, being just west of the intersection with Eve Street and with the site extending towards a busy railway line, at Erskineville. This is an improving inner south western suburbs area which stands about 5 kilometres from Sydney Central Business District and is closeby to the extensive Sydney Park passive and active recreation reserve. This section of Erskineville was formerly an unsightly and unappealing industrial area and a number of industrial buildings remain nearby. The area has evolved significantly over recent years to be a more residential precinct and we acknowledge that the massive Sydney Park Village adjoins to the east, being a large multi-stage and multi-level apartment project which has been developed over the past three years. Adjoining the subject to the west is a new and significant complete known as 'Zenix' which is a six (6) storey contemporary project which extends to nearby Sydney Park Road. The 'Zenix' project extends to adjoin the railway line between Erskineville and St Peters stations. Closeby on the corner of Coulson Street and Eve Street is a new six (6) level apartment complex known as 'Glo' which provides the key sales evidence for new stock in this case - see later in this report. As previously mentioned, the Sydney Park recreation reserve, with its passive and active facilities, is within walking distance of the subject property. It provides a pleasant amenity to what is a generally unimpressive mixed residential/industrial precinct. There are local convenience shops provided within the Sydney Park Village next door and good sub-regional type shopping is available within the Marrickville Metro centre - within 1.5 kilometres. The popular restaurant/cafe strip along King Street, Newtown is within close proximity. This area is well serviced by bus transport and as previously mentioned, the Erskineville and St Peters railway stations are closeby. The subject property is in the reasonably proximity of Sydney Airport but a perusal of flight path maps available indicate a very minor affectation only. Coulson Street is an average type of industrial/residential thoroughfare which passes under the nearby railway line. The road construction is of full width concrete with concrete kerb and gutter and bitumen and concrete footpath areas. Above the ground electricity reticulation together with town water, sewer and telephone are available and are connected to the subject property. DESCRIPTION OF LAND This is a parcel of building land which stands at road height at the front alignment and which features a very slight rise to the rear boundary and a slight west to east crossfall. DESCRIPTION OF EXISTING IMPROVEMENTS Erected upon the subject land are two (2), 1920's/1930's vintage factory buildings of single and two storey type of brick construction with corrugated asbestos and corrugated iron roofing. The standing improvements will require demolition and removal to facilitate the proposed redevelopment. We have proceeded upon the basis that asbestos based building materials will be disposed of in an appropriate Department of Environment and Conservation (DEC) approved manner. DESCRIPTION OF PROPOSED IMPROVEMENTS Proposed for erection upon the subject land is a six (6) level apartment building over two (2) basement carparking levels. The proposal is for a contemporary style building which will stand over reinforced concrete footings, have concrete flooring throughout, external walls of cavity face brickwork and tiled roofing. Powdercoat aluminium window and external door joinery will be provided and the internal linings will be of rendered brick, set plaster and plasterboard. The complex will be accessed via two (2) - entrance foyers with automatic glass doors activated by a security intercom system and accessing ceramic tiled lift lobbies where slow passenger lifts will service the basement carparking and upper residential levels. A reasonably significant number of two (2) level maisonette style apartments are proposed, as is a common rooftop recreation terrace. The breakup of apartment types and living area ranges is as follows: 1 X Commercial (43 square metres) 6 X Studio (41-49 square metres) 42 X One bedroom (46-47 square metres 51 X Two bedroom (79-95 square metres) 4 X Three bedroom (97 squares metres 104 Total

[21]

... We are advised that construction is to be addressed upon the basis of a Developer/Builder and we have been provided with a construction cost estimate (including demolition) of $18,720,000 ($180,000 per unit) over a construction period of eighteen (18) months. We have included the likely cost of landscaping works within the reserve land adjacent and have adopted a total construction cost of $19,000,000. The above estimates are considered reasonable to produce an appropriate standard of product and to cover possible cost overruns, we have factored a 5% contingency ($950,000) into our calculations, although we acknowledge that the above costing and time estimates have not been supported by a professional Quantity Survey. GENERAL COMMENTS The subject is a significant redevelopment site which is zoned Mixed Uses and which stands within the former unsightly and unimpressive Erskineville industrial area, in Sydney's inner south. The site currently provides older industrial type improvements most recently utilised for clothing manufacturer and which are vacant. The improvements will require demolition and removal to facilitate a redevelopment. Conditional Development Consent is in place for a multi-level project to produce one hundred and four (104) apartments of studio, one, two and three bedroom type and including a single ground floor commercial unit. The predominate apartment types will be of one and two bedroom accommodation. Seventy seven (77) resident carspaces will be provided. The subject is a well designed and specified project which will produce quite market acceptable apartments with an appropriate level of finish proposed. Although this area was formerly quite unappealing, over recent years, a significant amount of good quality residential redevelopment has been addressed. We acknowledge the major projects of Sydney Park Village and Zenix which flank the subject site. Furthermore, a new six (6) level project known as 'Glo' was recently completed and is in the latter stages of marketing in the close vicinity. Further development sites were noted nearby. We envisage that the vast majority of older industrial buildings will be eventually replaced with apartment buildings and this area will in the future provide a good standard residential precinct. This area benefits significantly from the massive Sydney Park passive and active reserve lands which stand closeby to the south. The subject project has been pre-sale marketed from September, 2003 and we are advised that a total of forty eight (48) apartments are pre-committed to date with twenty seven (27) apartments having proceeded to Contract exchange and with twenty one (21) apartments at exchange pending stage awaiting settlement of the site acquisition. The total consideration for pre-sales is $22,898,500 and the average price achieved is $477,052 per unit. A pre-sale status report and extracts from pre-sale contracts are appended. We have proceeded upon the basis that these pre-sales are confirmed as bona fide by your legal advisors. ... APPROACH TO VALUATION Given the lack of appropriate site sales evidence relative to the current soft market conditions and reflecting the 46% pre-sale proportion, we have addressed the Site Value (with Development Consent) upon the basis of a residual site feasibility (hypothetical development) exercise per a computer generated Cash Flow Analysis spreadsheet. In this case, we have assessed an achievable Gross Realisation primarily defined by the pre-sales to date and have deducted site acquisition costs, unit disposal expenses, construction costs, interest and holding charges and an appropriate Development Margin to produce a Site Value (with Development Consent). The Gross Realisation has been approached upon an average sale price per apartment of $475,000 - being supported by the pre-sales to date (see above) and furthermore, the average sale price being achieved within the key comparable as follows: 2 Eve Street (corner Coulson Street), Erskineville 'Glo' A new five (5) level contemporary style apartment complex in close proximity to the subject. Good standard finishes with lift access. Air conditioned one, two and three bedroom apartments with basement (security) parking. Ninety (90) apartments in total. Similar level of finish. Common facilities include pool and gymnasium to date, forty two (42) apartments have sold from late 2003 but with activity quite slow recently. Note the range: Type Area Range m2 Sale Price Range One bedroom 54-70 $325,000-$390,000 Two bedroom 74-90 $435,000-$560,000 Three bedroom 95 $40,000-$6000,000

[22]

The latest and most relevant sales recorded within 'Glo' are as follows: Unit Bedrooms Parking Contract Price 2 2 7/04 $479,000 4 2 8/04 $479,000 5 2 7/04 $490,000 10 2 8/04 $476,000 11 2 8/04 $494,000 13 3 8/04 $589,000 14 3 8/04 $558,000 17 1 9/04 $365,000 24 1 9/04 $325,000 27 1 8/04 $374,136 31 2 8/04 $450,000 43 11/04 $495,000 46 3 7/04 $540,000 47 3 7/04 $600,000 51 3 8/04 $500,000 52 3 7/04 $595,000 54 2 10/04 $535,000 56 2 7/04 $435,000 71 2 10/04 $495,000

[23]

The average sale price achieved in overall sales per apartment is $483,585. As above, the Gross Realisation (inclusive of GST) is 104 units at $475,000 (average) per unit - a total of $49,400,000. GST will be payable in respect of the unit sales and will be absorbed by the developer as a project expense. We have assumed that the 'Margin Scheme' could be utilised to minimise the GST payable and the calculation of GST and the Gross Realisation (net of GST) is as follows: Gross Realisation (incl. GST) $49,400,000 Less Land Value (see Cash Flow Analysis) $12.000,000 Margin $37,400,000 GST @ 1/11 $ 3,400,000 Gross Realisation (incl. GST) $49,400,000 Less GST $ 3,400,000 Gross Realisation (net of GST) $46,000,000 Average per Unit (104) $ 442,308 Round to (for Cash Flow Analysis purposes) $ 442,300 Therefore, the Gross Realisation (net of GST) is 104 units @ $442,300 = $45,999,200 CASH FLOW ANALYSIS In order to address the Site Value assessment, we have produced a Cash Flow Analysis per a computer generated spreadsheet - which analysis has been predicated upon the following critical assumptions.

Site acquisition costs are payable at the outset of the project.
A Construction Certificate is available.
A project duration of twenty four (24) months, which relates to eighteen (18) months of construction and the remainder to complete marketing.
A construction cost estimate of $19,000,000, plus a 5% contingency ($950,000).
An average Gross Realisation (inclusive of GST) of $475,000 per unit - a total Gross Realisation (inclusive **of GST) of $49,400,000.
GST calculated, per the 'Margin Scheme' at $3,400,000.
An average Gross Realisation (net of GST) of $442,300 per unit - a total Gross Realisation (net of GST) of $45,999,200.
We have factored seventy five (75) pre-sales (current pre-sales plus sales during construction) into our calculations and then a sales rate of six (6) to eight (8) units per month thereafter.
Fully funded project with no equity by the Developer - and interest charges calculated at a rate of 8.5% per annum.
A targeted Development Margin (after interest) in the range of 17.5% - 20.0% and an Internal Rate of Return
(IRR) in the range of 20.0% - 25.0%. The Site Value has been approached upon a sensitivity basis and the input of a Site Value of $12,000,000 ($115,385 per unit site) has produced a Development Margin (after interest) of 18.46% (profit of $6,898,702) and an Internal Rate of Return (IRR) of 21.52% - considered to be marketable incentives in the current market conditions and given the level of pre-sales to date. [While the Cash Flow Analysis was attached to the Valuation I have not reproduced it here] ... SUITABILITY OF PROPERTY FOR MORTGAGE SECURITY PURPOSES The medium density market within inner south Sydney has suffered from poor absorption rates in a general oversupply situation recently. The market of mid to late 2003 was sound with good sales rates noted, but interest rate rises and negative market sentiment late in 2003 caused the market to soften. Those poor market conditions have continued into year 2004 and the implementation of exist Stamp Duty on investment sales in mid 2004 has further damaged a soft market. Value levels have decreased generally and there is a potential for a further diminution in values in the short term, in our opinion. There are a significant number of new apartments available, under construction or 'in the pipeline' within the South Sydney area generally and we can highlight the areas of Green Square, Waterloo and Zetland where oversupply is in evidence. A project such as the subject would be difficult to support in a normal context, but we do acknowledge that the significant pre-sales evident to date has motivated our more favourable consideration. We acknowledge that some 46% of the apartments are pre-committed to Contract or with Contract exchanges pending, with the level of sales supporting the reasonable marketability of this site, in our opinion. We have proceeded upon the basis that the sales that are exchanged or have exchanges pending are bona fide and can be confirmed as such by the Lender's legal advisors, with this course of action recommended. Notwithstanding the valuation adopted in this case, we advised that Ray White Real Estate (Marrickville) fielded an offer from a Singapore based company to purchase this site at $15,500,000, but our analysis of the project supported an opinion that this offer is excessive and cannot be supported as market based. Given the level of pre-sales, the subject would have reasonable appeal (even in the current soft market) to a number of medium sized builder/developer groups still active in the Sydney periphery areas. The subject site is considered saleable at the provided valuation and to constitute a satisfactory basis for mortgage security, subject to confirmation of the pre-sales as bona fide and to those general provisions and disclaimers indicated in this report. INSURANCE ASSESSMENT Not applicable in this case as the standing improvements will require demolition and removal to facilitate redevelopment. VALUATION We are of the opinion that a fair and reasonable valuation with regard to the Residential Redevelopment Site at Numbers 2-4 Coulson Street, Erskineville, New South Wales, 2043, is in the sum of $12,000,000 (Eleven million dollars) (sic) GST exclusive, as at 2nd December, 2004, being upon the basis of a fee simple in possession interest, with vacant possession, subject to confirmation of the pre-sales as bona fide and to- those/general provisions and disclaimers indicated in this report." 44The reference to "(eleven million dollars)" in the last paragraph (above) is an error. The parties agree that it should read "(twelve million dollars)". 45In summary, Mr Phillips chose the residual site feasibility (hypothetical development) approach for the first valuation. While he agreed that it is prudent for a valuer to use more than one approach to provide a cross check, he qualified this approach by saying that this is only the case if the data is available. His evidence was that he could not do a cross check for the first valuation "because relevant data in respect of comparable sales sites was not available". Mr Phillips also clarified that "in the case of a development site with consent and pre sales" the comparable sales approach is not a more desirable approach (T256-257). 46When using the comparable sales site approach Mr Phillips does not regard sales older than 12 months as being reliable and he therefore disregards them. He gave evidence that he did not find anything more recent in terms of sales of development sites in that area within 12 months of the valuation (T332). He also refers to this in his report (as extracted above in bold) "Given the lack of appropriate site sales evidence...we have addressed the Site Value (with Development Consent) upon the basis of a residual site feasibility (hypothetical development)". I shall return to the topic of the searches Mr Phillips conducted under the heading "Credibility of Mr Phillips".

[24]

Provident Capital's consideration of first valuation 47On 14 December 2004, Mr Roots advised Ms Gold that John Virtue had advised verbally that the valuation figure was $12M and that they would have the full report on Wednesday; and on that basis their loan would be $7.920M (subject to the valuation being in order) (TB 469). 48Both Mr Roots and Mr O'Sullivan signed a valuation certificate on behalf of Provident Capital for the MMT loan. It is not clear when this occurred. Whenever they considered the valuation, they exercised some of their own discretion. The valuation certificate contains the following (TB1104):

'Are the instructions to the valuer correct and appropriate' A cross appeared in box marked "Yes". 2 'Has the valuer addressed his report as per the instructions' A cross appeared in box marked "Yes".
'Is the report complete (if not, provide details)' A cross appeared in box marked "Yes".
'Has the valuer commented on any adverse findings likely to affect the security or saleability (If yes, provide details)' A cross appeared in box marked "Yes" and the following notation was made: "Has commented that due to slow down in market need to ensure that pre sales are in place".
'Is the forced sale value less than 15% of the value for mortgage security purposes. (If yes, refer application to senior underwriter/managing director).' A cross appeared in box marked "No"
'Has the Valuer been instructed independently of the borrower. (If no, refer application to managing director)' A cross appeared in box marked "Yes".
'Is the valuation correctly addressed to Provident Capital Limited. (If no, please instruct valuer to re issue. Transaction is not to be certified for settlement without correctly addressed valuation report).' A cross appeared in box marked "No".
'Please detail any other areas of concern'. The following notation was made: "As above".
'Do we hold a copy of the valuers PI cover. Is it current.' A cross appeared in box marked "Yes". 49From these comments, it is evident that Provident Capital was satisfied that Mr Phillips had addressed his report as per instructions. They were aware that Mr Phillips had drawn to their attention that there had been a slow down in the market and this could adversely affect the security or saleability of the property market. Provident Capital was aware that John Virtue had cautioned them that because of the slow down in the market it was important to ensure that the presales were in place.

[25]

The disclosure document between Provident Capital and MMT 50It appears that MMT was having difficulty raising the amount required for the balance of $2.845M for settlement on the property. On 4 February 2005, the solicitors for MMT sent a facsimile to Provident Capital advising that the property was to be purchased by MMT and requesting that Provident Capital prepare amended security documentation with MMT as the borrower (TB 495). On 4 February 2005, Provident Capital issued an offer of loan facility to MMT (TB 490-494). 51On 15 February 2005, the solicitors for MMT provided Provident Capital's solicitors with a copy of a disclosure document (TB 515-517). 52The disclosure document stated that: (1) The purchase price to be paid by MMT for the property was $12.168M (2) The sum was to be paid as follows: (a) Cash component of $9.718M (plus or minus contract adjustments); and (b) Consideration in kind of $2.450M which is represented by 9 exchanged contracts for sale for "off the plan" units which are to be constructed on the Security. (3) As security for performance by MMT of its obligations under the contract for sale for the security (including the consideration in kind referred to in (b) above) MMT will grant to Herro a third mortgage over the security on settlement of the contract for sale of the security to MMT. 53On 17 February 2005, the solicitors for MMT provided Provident Capital's solicitors with a copy of a further disclosure document (TB 527-530). Provident Capital refused to sign any disclosure document, however entered into a deed of assignment with Toubia and MMT (TB 633-638), and entered into a deed of priority with the Mezzaine Lender, Capital Access and MMT (TB 639-650). 54Mr Turner an employee of Provident Capital gave evidence that at this stage there was a shortfall in funds (T429-430): CATSANOS: There's a disclosure document which Provident refused to execute, but in February of 2005 it was being disclosed to Provident that the arrangement for the purchase reflected that which amounts at the bottom of page 516, namely, a cash component of $9,718,000 and a payment in kind. Do you see? WITNESS TURNER: 2540, yes. HER HONOUR: Yes. CATSANOS: Yes. What in fact happened was that the transfer, the purchase price was $10,765,000. In other words, what's said to have been the proposal in the disclosure document was not ultimately what transpired. Were you aware of that? WITNESS TURNER: No, I wasn't. CATSANOS: Right. Do you know anything of - you know obviously that Provident advanced in total $8,920,000. Correct? WITNESS TURNER: Yes. CATSANOS: And you know also, as you understand it, that the purchase price was $10,765,000? WITNESS TURNER: Correct. CATSANOS: So there was a shortfall? WITNESS TURNER: Correct. 55On 25 March 2005, Provident Capital advanced funds equal to 66 percent of the valuation, being $7.92M. Both Michael Toubia, sole director of Toubia, and Monica Toubia, sole director of MMT, also gave guarantees. Provident Capital took a registered first mortgage over the property. 56Provident Capital then agreed to advance an additional sum of $1M to MMT pursuant to a limited guarantee provided by Capital Access Holdings Pty Ltd ("Capital Access"), the second mortgagee to the property. The $1M was basically advanced to Capital Access. In one sense, this meant that Provident Capital advanced a total amount that was greater than 66 percent of the purchase price. 57On 2 March 2005, the funds were advanced to MMT. The following deductions were made from the advance, an establishment fee of $331,000 and interest in advance of $458,149.29. 58The limited guarantee provided by Capital Access was subject to different conditions to the primary advance of $7.920M. The funds advanced pursuant to the Capital Access guarantee were to be repaid by 15 April 2005. Capital Access (the Mezzaine funder) could not pay the $1M by the due date. 59There was a further concession requested this time by Capital Access not MMT. It requested an extension to pay the balance of $700,000. Following discussions with Capital Access, Provident agreed to amend the terms of the agreement to allow Capital Access additional time to repay the loan as follows: $300,000 on 15 April 2005; and $700,000 on 29 April 2005. 60Provident also required a loan variation fee of $20,000 to be paid. Capital Access paid these amounts to Provident. 61In late May 2005, arrangements were made with MMT to rollover the loan for a period of 90 days with the new maturity date to be 17 September 2005. The conditions of the rollover were: a A monthly rollover fee of $30,000 for each month, or part thereof, that the loan remained outstanding during the rollover period; b Interest in advance at the lower - discounted rate of 11.25 percent for the 90 day term. 62If the loan was not repaid within the 90 day period of the rollover, the loan would be considered to be in default. This would result in the higher rate of interest of 17.25 percent being charged for the 90 day period of the rollover, and the balance of the rollover fee, being $331,000 less any monthly rollover fees already paid, would be due and payable. Capital Access paid the rollover fee and interest in advance on behalf of MMT. 63On 17 September 2005, the loan was not repaid. Provident Capital took possession of the property and commenced a marketing campaign for its sale on a mortgagee in possession basis. A second valuation of the property was sought from Mr Phillips. 64On 16 October 2005 John Virtue, in his second valuation, valued the property at $7M for a "normal sale" valuation and at $6.25M as a forced sale value. To arrive at these amounts he used two methods, namely, the comparative sale method and residual site feasibility (hypothetical development methodology)). In the first report Mr Phillips used only the residual site value feasibility (hypothetical development) methodology. 65During 2005 and 2006, Provident Capital received, through its agent Ray White, offers to purchase the property in the vicinity of $6M to $7M. 66In June 2007, the development application that related to the property expired. As there were no reasonable offers to purchase the development before this time, Provident Capital says it had to attend to measures in order to keep the development application in force. This included "substantial demolition works and commencement works" in the order of $2.8M. 67On 22 February 2007, the property was sold to AV Jennings for $12,506,720.

[26]

Credibility of Mr Phillips 68It is convenient that I record my observations of Mr Phillips and assess his credibility. I closely observed Mr Phillips when he gave evidence and was cross-examined. 69Counsel for the defendants accepted that Mr Phillips evidence was at times confusing, but it had to be taken into account that it was the first time he had ever been in court and given evidence. Provident Capital submitted that this Court should approach Mr Phillips' evidence with caution because he sought to improve his evidence in the witness box and referred to four specific areas where it is said that Mr Phillips sought to improve his position. They are: firstly, in relation to the searches that he conducted prior to the valuation; secondly, the costs of the construction; thirdly, the conversations with Ms Gold; and lastly, the conversation with Mr Warren Baikie. 70Mr Phillips is a certified practising valuer and an Associate of the Australian Property Institute. He has been a valuer for over 30 years. Mr Phillips: attends professional education by the institute; receives publications; considers himself bound by the ethical rules; considers it to be part of his professional responsibility to keep in touch with the guidelines and rules of conduct of the institute; and considers that compliance with those guidelines and rules of conduct is an important part of the reasonable and careful practices of a valuer (T255-256). 71Mr Phillips deposed (Aff, 1/12/10) at [15], [16] and [17]: "15 Although I do not have a file note of my discussion with Roots, the effect of the words stated in that discussion was that I should provide a valuation on the basis of a site value with development consent for a project of 104 apartments (the Price Instructions)." Preliminary inquiries 16 On 23 November 2004, I arranged for two searches to be conducted as follows: 16.1 A search on the Property which revealed: 16.1.1 A prior sale for $275,000 in November 1997; 16.1.2 The owner to be Herro. 16.2 A search on other properties on Coulson Street which had sold within the previous 12 months. 17 The searches were conducted on the RO Data site ..." 72In cross-examination, Mr Phillips agreed that he had exhibited to his affidavit the documents he took into account in arriving at his valuation (T278.30-31). He agreed that the searches he performed on the RP data or otherwise, were all exhibited to in his affidavit and other documents he considered in arriving at his valuation were also exhibited to his affidavit (T278.34-40). 73In cross-examination, Mr Phillips gave the following evidence (T279-280): Q. If we go to p 6 of your exhibits? Pages 6 and 7 are the RP data searches you did in connection this valuation aren't they? A. Some of. Q. You now say there are others? ... BRAHAM: I asked him a minute ago whether the extent he did searches and RP data and otherwise they were exhibited to his report. WITNESS: They are but there was other data that was available in our practice. Q. A minute ago I asked you to confirm if you considered a document in relation to your valuation that you exhibited to your reports and you agreed that was wrong? A. There was a cross reference to the sales within the Glo project yes. ... Q. Are you saying you did other searches within your office? A. I did. Q. And you haven't annexed the results of those searches? A. Yes. No it is obviously a fault of mine. ... Q. Do you know what are those other reports? A. That they would have been RP data and whatever was available in our office. Q. You don't know what those searches are? A. They are not in my affidavit. Q. And you do not remember them do you? A. I remember their reference to my report at the time. Q. You can read the report and draw inferences from that. Is that what you are saying? A. No. I drew the inferences from the data. Q. Look Mr Phillips: You have exhibited to your report two RP data searches in connection to this valuation. Do you agree? A. I do. Q. You make no reference in your affidavit to having done any other RP data searches, correct? A. Correct. Q. In paragraph 17 of your affidavit? A. Could I just go back? 16.2 says: "A search of other properties on Coulson St which sold within." That is that information. Okay. Yes. Q. You say in paragraph 16 on 23 November you arranged for two searches to be conducted as follows and you set them out. Do you see that? A. Yes. Q. Paragraph 17 you say the searches were done on the RP data site and could be found in your exhibits? A. Yes. Q. You make no other reference in the affidavit to any other preliminary inquiry do you by way of search? A. No, because I was dealing with data that was already available in our office files. Q. Where do you refer to that in your affidavit? A. It is not there. 74Mr Phillips' evidence on the topic of searches was inconsistent. He had not referred to any searches other than real property searches on the subject property and Coulson Street in his affidavit. The most plausible explanation for this evidence is that with the benefit of hindsight, he thought that he must have carried out computer searches in relation to the property but could not remember what internal computer programs were used at the end of 2004. He probably did carry out a search as he found one comparable (even though it seems there were actually two) comparable sales within the last 12 months prior to 4 December 2004. 75Mr Phillips gave evidence that the only conversations he had with Ms Gold occurred shortly after 24 November 2004 and 2 December 2004 and that he had no other recollection of a conversation with Ms Gold. The only written communication he had with Ms Gold was by facsimile dated 9 December 2004. (T278.42-50; T279.1-2). 76When asked about how he had arrived at the construction cost of $19M, Mr Phillips gave evidence that Ms Gold had advised him that $18.72M had been budgeted for construction cost and that she had advised him of this at their meeting. He did not have a file note, it was not in the report, and he could not recall if it was in his affidavit. But as Ms Gold was the only person he had a conversation with in relation to the property it was her. (T301.11-27). 77Mr Phillips was then asked the source from which he ascertained the construction figure. He answered that he spoke to a quantity surveyor colleague. (T325). He said that he was positive about this but he did not keep a record of this conversation. He admitted that it was not recorded in his report nor in his affidavit. (T325.25-45). In further cross examination, Mr Phillips said that it was an opinion of the quantity survey expressed during a phone call. Mr Phillips says he gave a broad brush description of the project to the quantity surveyor, who was very experienced in the area, and he gave Mr Phillips advice. (T327.5-12). 78Prior to cross examination Mr Phillips gave evidence that he had not told anyone about that conversation before. He could not recall if he had told anyone about the conversation prior to this hearing. When asked in cross-examination who the quantity surveyor was he replied, "Graham Whitely. Hugh Quantity Surveyors." (T327.14-24). 79Mr Phillips was asked in cross-examination about the second valuation where it stated, "It is our current advice that the abovementioned presales are no longer relevant and have been disregarded." Mr Phillips said that Mr Baikie instructed him and he followed up his instructions in a telephone conversation. He agreed that this was a critical piece of information with regard to manner he approached the second valuation. Mr Phillips assumed that this conversation was contained in his affidavit but agreed that there was no mention of Mr Baikie on page 8 of his affidavit (T316-317). Mr Baikie was the one who instructed Mr Phillips for the second valuation. I accept that it is very likely that there was a conversation between Mr Baikie and Mr Phillips in relation to the role of presales. 80It was the first time that Mr Phillips had ever been required to give evidence in court. Where Mr Phillips' credibility was challenged it was because he had omitted to include a piece of information in his affidavit. When he was asked a question about that piece of information and its source and it was pointed out to him that it was not in his affidavit, it did not portray him in a good light. It is my view that Mr Phillips gave truthful evidence. While the sources of the information were not included in his affidavit, a lot of information had been. He did not keep many file notes so he had to rely upon his memory when he prepared his affidavit. His explanations as to the source of that information were consistent with the rest of his evidence and with other facts known to the parties.

[27]

Negligence 81It is not disputed that the valuer owed a duty of care to Provident Capital to exercise reasonable care and skill in preparing the valuation. But did he fail to meet the standard expected of a reasonably competent valuer? 82Both parties referred to Kenny & Good Pty Ltd v MGICA [1999] HCA 25; (1999) 199 CLR 413. The short facts are as follows. At the request of a lending institution (MGICA), a real estate valuer valued a property under construction at $5.35M as it stood and $5.5M on completion. The valuation report contained a statement that a named mortgage insurer "may" rely on the valuation in the same way as the lender. The insurer agreed to indemnify the lender. The actual value of the property at the time of report was in the order of $3.9 to $4M. The report stated that the property was a suitable security for the investment of trust funds to the extent of 65 percent of the valuation for a term of three to five years. The lender lent $3.575M. The borrower defaulted. The property was sold for $2.65M, which was its value at the time of the sale. The insurer indemnified the mortgagee for the deficiency in principal and interest, which was $1,977,513.67. The insurer sued the valuer in negligence. 83At [83] Gummow J stated: "In this case, MGICA relied upon the valuers to exercise reasonable care and skill in providing the valuation. The relationship of reliance was particularly close in that but for the valuation MGICA would not have acted to its detriment in entering into the mortgage insurance transaction. Further, given the text of their Report, the valuers knew, or ought to have known, that their representations would be relied upon by MGICA." And at [116] Kirby and Callinan JJ held: "The instructions, and the terms in which they were complied with, and the valuation provided, all give content to the duty of care in this case, as they will in most, if not all, such cases." 84In Hann Nominees Pty Ltd v National Australia Bank Ltd [2000] FCA 454 the Full Court of the Federal Court, per Tamberlin, Sundberg and Emmett JJ stated: "[26] Because a valuation does not admit of a precise conclusion, competent and careful valuers may properly differ as to a particular figure. Therefore difference of result does not necessarily mean that a valuer has been negligent. However where a valuer determines a figure which is outside a range of values which could properly be arrived at by a competent valuer the Courts have taken the view that such an over-valuation affords some evidence of negligence on the valuer's part ... [29] The relevant principles were also considered by the English Court of Appeal in Merrivale Moore Plc v Strutt & Parker [1999] 2 EGLR 171 at 176-177 where Buxton LJ (with whom Nourse LJ agreed) pointed out that a finding that a valuation fell outside a reasonable range or "bracket" is not of itself sufficient to establish negligence but it substantially eases the task of the Court in deciding whether a valuer has been negligent. His Lordship was not prepared to hold in general terms that the adducing of evidence to the effect that the valuation is outside a reasonable range or bracket is a necessary precondition to a finding of negligence on the part of a valuer. He considered it may be open to a Judge, in a suitable case, to hold that a valuation figure is so far removed from what is the true value of the property that it could be regarded as a valuation that was outside the limits open to a competent valuer without specific professional evidence being given of what those limits were." 85In Adwell Holdings Pty Ltd v Smith [2003] NSWCA 103 Meagher JA (Mason P and Buddin J agreeing) agreed with the court in Hann Nominees Pty Ltd v National Australia Bank Ltd, stating at [9]: "In Singer & Friedlander Ltd v John D Wood & Co [1977] EG 569 Watkins J said: The valuation of land by trained, competent and careful professional men is a task, which really, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumptions. Therefore, he cannot be faulted for achieving a result, which does not admit of some degree of error. Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work. Since then, Judges seem to have taken a figure of 10% (or, in some cases at least, perhaps 15%) of the true figure to constitute an area, or bracket, within which, prima facie, a valuation is not negligent. But the importance of that "bracket" notion must not be misunderstood. It is not a statement of some principle that no valuation within the bracket can, as a matter of law, be negligent. That such a valuation can still be negligent is not only a matter of common sense, but has been judicially developed in such cases as Interchase Corp Ltd v ACN 010 087 573 Pty Ltd (Supreme Court, Queensland, 520 of 1994, BC 200000188) [this appears to be a reference to [2000] QSC 013] and Lion Nathan Ltd v Coca-Cola Bottlers Ltd [1996] 1 WLR 1438. Once one finds that a valuation is within the "bracket", one can infer that prima facie, but only prima facie, it is not tainted by negligence; of course, it may have been arrived at by negligence, but that fact must be proved; one can never say that purely because a figure is within the "bracket", no negligence can be involved; but, on the other hand, if one arrives at a conclusion that a particular valuation is correct, one may turn to the "bracket" test as a check." 86From the latter two cases, the courts have accepted that there are so many imponderables that confront a valuer that two able and experienced valuers may come to different conclusions without anyone lacking in competence and reasonable care. An allowance can be made that valuation figures may vary between 10 to 15 percent.

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The content of the duty of care and whether there was a breach 87The content of the duty owed by the defendants to Provident Capital can largely be determined from the terms of the instructions given to them: see Kenny & Good per McHugh J at 439 [58], Kirby and Callinan JJ at 456 [116] and Gummow J at [83]; Vero Lenders v Taylor Byrne [2006] FCA per Greenwood J 1430 at [50]. In relation to whether the defendants breached their duty of care owed to Provident Capital, both parties relied upon expert evidence. 88When distilled, counsel for Provident Capital in cross-examination of Mr Phillips sought to criticise his first valuation on five grounds, namely: failure to carry out a comparative analysis; not undertaking/documenting searches; the unit price ascribed to the individual apartments for the purposes of a feasibility analysis; assumptions made as to the construction costs for the purposes of a feasibility analysis; and assumptions made as to the number of presales for the purposes of a feasibility analysis. 89In summary Mr Phillips reported in the first valuation under "Approach to Valuation" (as quoted above in bold): "Given the lack of appropriate site sales evidence relative to the current soft market conditions and reflecting the 46% pre-sale proportion, we have addressed the Site Value (with Development Consent) upon the basis of a residual site feasibility (hypothetical development) exercise per a computer generated Cash Flow Analysis spreadsheet." In this case, we have assessed an achievable Gross Realisation primarily defined by the pre-sales to date and have deducted site acquisition costs, unit disposal expenses, construction costs, interest and holding charges and an appropriate Development Margin to produce a Site Value (with Development Consent)". 90Mr Phillips concluded that: "...a fair and reasonable valuation with regard to the Residential Redevelopment Site at Numbers 2-4 Coulson Street, Erskineville, New South Wales, 2043, is in the sum of $12,000,000 (Eleven million dollars) (sic) GST exclusive, as at 2nd December, 2004, being upon the basis of a fee simple in possession interest, with vacant possession, subject to confirmation of the pre-sales as bona fide and to those/general provisions and disclaimers indicated in this report." 91Mr Phillips set out the assumptions he relied upon in carrying out his cash flow analysis that forms part of the information he used in his residual site feasibility exercise. Provident Capital submitted that two of those assumptions were wrong, firstly, an average gross realisation (net of GST) of $442,300 per unit - a total gross realisation (net of GST) of $45,999,200; and secondly, Mr Phillips had factored seventy five (75) pre-sales (current presales plus sales during construction) into his calculations and then a sales rate of six (6) to eight (8) units per month thereafter. 92I shall examine Provident Capital's complaints, which can be summarised as follows: failure to carry out comparative analysis and not undertaking searches; the unit price ascribed to the individual apartments for the purposes of a feasibility analysis; assumptions made as to the number of presales for the purposes of a feasibility analysis; assumptions made as to the construction costs for the purposes of a feasibility analysis; and finally, using only one method of analysis.

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Expert evidence 93Each party relied upon expert evidence in relation to two topics, firstly, the expertise of valuers and secondly, expert evidence in relation to prudent lending practices of a non-conforming lender. So far as the valuation evidence is concerned, Provident Capital relied on the report and evidence of Mr Davis. Mr Davis is the sole director of J T Davis & Associates Pty Ltd. He is a Certified Practising Valuer with 38 years' experience in valuing properties throughout New South Wales and the United Kingdom. The defendant relied upon the report and evidence of Mr Robert Rowlands, who is the CEO of Landsbury Property Pty Ltd. He is registered valuer in New South Wales and Queensland and a Fellow of the Australian Property Institute and has had over 40 years' experience. The experts participated in a conclave. From that they wrote a joint report, which incorporated matters upon which they agreed and those upon which they disagreed (Ex C). 94Mr Terence John Davis prepared two reports dated 22 April 2010 and 2 September 2011. In the letter of instruction, he was provided with Mr Phillips' valuations. It was his opinion that valuations of development sites of the nature of this property are most often carried out by comparative sales analysis. Similar sites that have been sold in the open market and are in geographical and temporal proximity to the first and second dates could be identified and adjusted for relativity to the property. It was Mr Davis' opinion that the similar sales (sometimes referred to as comparative sales approach in this judgment) was the principal method of valuation employed in the valuation profession both in New South Wales and elsewhere in Australia and internationally (Report [109], 22/4/2010). 95Mr Davis also stated that it was considered good valuation practice to utilise an alternative methodology by way of a check on the conclusions reached by the primary approach. In this regard, he said that the alternative methodology that is common for valuers to carry out is a residual land value analysis. This methodology calculates the value of a development site by estimating the gross sales revenue of a finished project, and deducting appropriate allowances for development costs, profit and risk and selling costs (Report [111], 22/4/2010). 96Mr Davis relied primarily on site sales analysis in order to assess the market value of the property and used the "estate feasibility analysis" as an alternative approach. He says that the conclusion of his estate feasibility analysis broadly supports his primary approach. He valued the property as at 2 December 2004 at $8M. 97Mr Davis took into account the report of Mr Rowlands (notwithstanding the inconsistency of the 21 Coulson Street sale) together with the other comparison sales and comparison evidence and commentary contained in the Rowlands report. Mr Davis then made another affidavit. In this latter affidavit Mr Davis said that while he remained of the opinion that the value of the site was in the order of $8M, a range of $8M to $9M was nonetheless broadly consistent with comparison sales evidence. He had analysed the comparison sales in both the Davis and Rowlands reports in order to illustrate the veracity of this range of values. 98Mr Davis was of the opinion, especially having regard to the instruction of Provident Capital to John Virtue, that the primary valuation methodology that should have been adopted was of the nature of comparison sales analysis of similar development sites in the locality or in similar localities. The use of feasibility analysis was, in Mr Davis' opinion, a valid check methodology. 99When preparing his expert report, Mr Rowlands was not furnished with either of the valuations carried out by Mr Phillips. Hence, he did not know what method or methods Mr Phillips used nor did he know the valuation figure Mr Phillips valued the property. Mr Rowlands was instructed (letter 1/12/08) to provide a retrospective valuation of the property on a vacant possession basis for mortgage purposes as at 2 December 2004. 100At [15] under the heading "Valuation" Mr Rowlands stated that, in his opinion the market value assessed by direct comparison as at 2 December 2004 with vacant possession and development approval was $12M. Mr Rowlands was of the opinion that the market value assessed by the development feasibility study as at 2 December 2004, subject to development approval, and the assumptions/conditions contained in the report, was $11.75M. It was also his opinion that a reasonable range in market value assessed by a competent Valuer as at 2 December 2004 with vacant possession and development approval would be $11.5M to $12.25M. 101Mr Rowlands disagreed with Mr Davis that the primary valuation methodology that is most often carried out is the comparative sale analysis. Mr Rowlands was of the view that in situations where a financier is considering providing finance for acquisition and/or development of a site that has development approval, a residual cashflow analysis was a fundamental requirement, and was always regarded as the primary method of assessing the market value of the land. This is also the approach that Mr Phillips took. 102Mr Rowlands says that the task of assessing the market value of a site with development approval requires the use of a methodology that enables the valuer to factor in all the conditions of the development approval. These being s 94 contributions and the cost of all off-site works, as well as the cost of construction, management of the building process, payment of interest on land and construction cost, marketing costs and establishing the effect of presales and projected sale rates on the profitability of the project. These could only be measured by preparing a residual cash flow analysis. 103Mr Rowlands said that it is the valuers' role to advise the mortgagee whether or not the project is viable at the land value promoted by the developer. Further that residual cash flow analysis is a methodology employed by developers to evaluate a project and by valuers to establish highest and best use, viability and market value of the land at a return that is acceptable in the marketplace. 104Mr Rowlands says that if a development site has development approval and presales in place and if the mortgagor is seeking finance to acquire and/or develop the site, it is always a requirement by mortgagees, the API Practice Standards and Professional Indemnity Insurers to have assessment using residual cash flow analysis. According to Mr Rowlands, direct comparison is only regarded as a subordinate methodology in this situation. It can be used to assist in understanding the broad value parameter applicable to sites similarly zoned and approved but not to establish the highest and best use and/or project viability. The use of sales and the direct comparison approach is utilised by valuers, as a primary method when preparing valuations of sites that do not have development approval, in situations where a financier requires an indication of site value so that a client can acquire or refinance a site prior to gaining an approval. 105Therefore the two valuers' opinions differ on the methodologies said to be most appropriate in these circumstances, being the comparison sales analysis (according to Davis) and the residual cash flow analysis (according to Rowlands). 106Provident Capital submitted that the Court should treat Mr Rowlands' steadfast adherence to his opinion of reasonable value in 2004 of the property at $12M with caution. Provident Capital says that Mr Rowlands did not offer a viable explanation for his strict adherence to his higher figure and that his unwillingness to oscillate even within the acceptable 10 percent band of variation showed his willingness to advocate his client's position. I do not interpret Mr Rowlands' evidence this way. It is my view he gave a straightforward, honest opinion. While he did not agree to a 10 percent variation he was not obliged to do so. He did provide the proper foundation for his opinion. 107Further, Provident Capital drew attention to the apparent friendship between Mr Rowlands and Mr Phillips, which was not one of simple collegial acquaintance. This was accepted by Mr Rowlands but denied by Mr Phillips and nowhere was their friendship mentioned in either of their written evidence. This was said to be a matter that an expert witness should properly have revealed. It is my view that these submissions are not of substance. All of the valuers have been in this business for between 30 and 40 years. No doubt their paths have crossed during this time. Both Mr Davis and Mr Rowlands commenced work at the Valuer Generals 30 years or so ago and knew each other from then. They have seen each other socially on occasion over the years. They are probably best described as professional colleagues. I do not accept that these factors in any way affected Mr Rowland's opinion. 108Provident Capital submitted that it was a calculated assertion by Mr Rowlands that he had not seen the valuation prior to preparing his report as he had access to the annexures to the valuation, which to any experienced valuer would tell of the target value and all relevant inputs. It was submitted that without proper explanation, the Court should draw an adverse conclusion. It is my view that it was not a calculated assertion that Mr Rowlands had not seen the valuation; it was his counsel who asked this question and he answered truthfully. The position was that he had not seen the valuation itself although a copy of the cash flow analysis was furnished to him. When he was asked if cash flow analysis was included as an annexure to his instructions, he freely admitted that it was. Nothing turns on this other than he did not know, without investigation, what figures Mr Phillips had arrived at in his valuations when he prepared his own report. 109Both experts carried out an analysis of comparative sales. In their joint report they agreed that seven properties could have been considered comparison sales, three with development approval and four without development approval, except there was tension between them as to whether the property at 21 Coulson Street, Erskineville was truly comparable (I shall refer to this in more detail shortly). There were three sale sites with development approval, namely 21 Coulson Street, Erskineville, 49 Henderson Road, Alexandra and 21-69 Regent Street, Redfern. There were four sale sites without development approval, namely 2-14 Eve Street, Erskineville, 30 Garden Street, Alexandria, 149-161 O'Riordan Street, Mascot and Glo, 16-20 Eve Street, Erskineville. All of these properties had completed contracts for sale in the period 31 October 2002 to 12 February 2004 (a period of 15 months prior to the date of valuation).

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The sticking point - whether 21 Coulson Street was a comparable sale 110It is necessary to consider this topic as it ultimately affects the calculation placed on the property the subject of the valuations. 111Mr Rowlands regards 21 Coulson Street as a relevant sale whereas Mr Davis, in his initial report (Court Book - 31) had no regard to it. Mr Davis considered it to be "out of line". 112In November 2001, this property was sold for $2.670M. In September 2003, it was resold for $5.560M. Mr Davis concluded that comparing the sale at 21 Coulson Street to the comparison sales of the Davis and Rowlands reports, it had been evident that the analysed elements of this sale appeared significantly high and out of line with the general market. In that respect he analysed the 21 Coulson Street sale both in respect of its actual sale price of $5.560M and the theoretical sale of value indicated by application of Residex data of approximately $3.133M. 113Provident Capital sought to make much of the affidavit evidence of Mr Vanvakaris. Mr Vanvakaris was and still is Chief Operations Officer of More Human Erskineville Pty Limited ("More Human"). He gave evidence as to the circumstances that gave rise to the purchase of 21 Coulson Street. More Human's approach is that it buys nearly all of its properties off market. One night over dinner, a director of More Human, Ghassy Bayni, was having dinner with Mr George Khoury who was a director of St Maarten. St Maarten owned 21 Coulson Street, Erskineville. Mr Khoury offered Mr Bayni and More Human the development at 21 Coulson Street. It already had development approval. More Human instructed a planner and architect inspect the site and carry out an evaluation as to what the completed site would have been worth. More Human had just completed and sold a site with approval for a lesser number of units at 1 Goodsell Street, St Peters ("the St Peters property") for a higher price. More Human was comfortable with the price because it got an indicative price on the St Peters property. That meant that they were able to extrapolate how much that had cost them. The result was that after taking into account those factors, it purchased the site in September 2003 for $5.560M. 114In evidence, Mr Rowlands did not agree with Mr Davis that 21 Coulson Street was an out of line sale. Mr Rowlands said that there had been a lot of market movement in that particular area between 2001 and 2003. Mr Davis' opinion differed because the site 21 Coulson Street had been granted a deferred commencement consent. It adjoins the railway line and because of this it had its own peculiar difficulties. Mr Davis said that a site of that sort has to comply with rail infrastructure regulation and requirements, which can be quite onerous. 11521 Coulson Street had formerly been an industrial site when it first sold. Mr Rowlands gave evidence that it was his view (although did not know for a fact) that when it first sold there was knowledge that the gauntlet had to be run with the Department of Planning Council and then Rail Infrastructure Corp to get a development approval and that no-one would have been able, at that time, to predict how long it would have taken to get an approval. He thought that what happened was the vendor had to discount the price in order to get it sold in 2001. He agreed that was the sale in 2003 by reference to 2001 and that it if was going to be considered out of line in 2003 that must assume 2001 was in line (T371 - 372). 116Mr Rowlands was asked (T372): CATSANOS: Are you saying, Mr Rowlands, you have doubts as to whether that's the case? WITNESS ROWLANDS: Well, yeah. I suspect that, you know, as I said, the 2001 price was a discounted price in order to dispose of the site knowing that it had these issues attached to it and knowing that the approval process could have been quite extensive and because it is quite onerous. I had to deal with these sites much, I've dealt with a big site out in Burwood that adjoins the railway line and I had firsthand knowledge of the process that had to be followed by my client at the time as I was advising in order to get a development approval. It was, it was a very, very expensive process. CATSANOS: In 2004, had you been doing this valuation, from what you've told us, you would have taken it into account? WITNESS ROWLANDS: Yes. CATSANOS: Mr Davis, you would not? WITNESS DAVIS: No. In my second affidavit, I won't bore the Court with the niceties of it, I just felt that such a jump in value, that it wasn't, it wasn't supported by the market. Sorry. 117Mr Rowlands stated that the earlier transaction, when 21 Coulson Street was sold in 2001 for $2.65M, was in all likelihood undervalued given the potential constraints on development then applying. 118Mr Rowlands was asked to comment on the affidavit of Mr Vamuakaris and if the affidavit in terms of whether in Mr Rowlands' opinion there was a new out of line sale, 21 Coulson Street (T375). Mr Rowlands' answer was that he thought the affidavit really mirrored what happens quite commonly within the development industry. He said sites trade between developers quite often, and a lot of development sites do not reach the market for one reason or the other. He said that often you would find that a developer will accumulate sites, find that he has too many, has not got the resources for all of them and offloads one or two. Mr Rowlands conclusion was that he was not convinced at all that this was an out of line transaction. 119The defendants submitted that geographically, 21 Coulson Street is of great comparability given that it is in the same street and close to the property. Temporally, it predates the Valuation by slightly more than twelve months. 120The defendants also submitted that whether or not 21 Coulson Street and its sale was in fact a sale relevant for comparative analysis is probably not the question - only whether it might be reasonable to have regard to it is relevant and that Mr Rowlands' arguments in this regard are persuasive, and on no view could it be regarded as unreasonable to take it into account. I agree. 121So far as 21 Coulson Street is concerned, I accept that it was not an unusual situation for a sale to occur off market. One such property where this occurred was 21 Coulson Street. While it is really a value judgment as to whether or not that property is included as a comparable, I prefer the view that it is. While on this topic of which expert's evidence I prefer, it is that of Mr Rowlands, mainly because during 2004/2005 he actually worked and valued land with development approval for commercial development in the geographical area of Erskineville and the surrounding area. While Mr Rowlands was familiar with the market in that area at the time Mr Phillips' valuations were made, in forming his opinion so far as the first valuation is concerned Mr Rowlands looked at only the records that would have been available to him as at the time, namely December 2004 (Mr Davis also adopted this approach). Mr Davis, while an experience valuer, did not work in that geographical location.

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(i) Failure to carry out comparative analysis and not undertaking searches 122It is appropriate that I now briefly mention the valuation guidelines, which have been referred to in evidence. The Australian Property Institute provides guidelines in the form of Guidance Notes from time to time. It is a professional practice and the guideline referred to is the 2004 version (Ex B). The two relevant topics are valuation approaches and comparables. 123The guidelines in the "General Valuation Chapter: Concepts and Principles" state at GN 9.0: "9.0 Valuation Approaches 9.1 Valuation of any type, whether undertaken to estimate market value or a defined non-market value, require that the Valuer apply one or more valuation approaches. The term valuation approach refers to generally accepted analytical methodologies that are in common use. In various States these approaches may be referred to as valuation methods." 124Chapter GN 2.1 is concerned with Valuation for Mortgage and Loan Security purposes. 125In Guidance Note 6.2 ("Feasibility studies") general considerations include: choice of comparables, number of variables, time and program constraints, sensitivity analysis using alternative assumptions, purpose of feasibility study and limitations of residual process. Relevant sections are extracted below (Ex B 264): "2.1 Choice of Comparables The preparation of a feasibility study generally relies on comparison of unit costs and rates from similar development schemes which are then applied to the particular development to be analysed. In using this approach, reasonable care must be taken to the choice of comparables to ensure that unit rates for other schemes do not reflect particular circumstances (e.g. exceptionally poor ground conditions, grossly different building specifications, different planning constraints). Equally, particular circumstances pertaining to the feasibility study being prepared should be carefully considered and reflected in the feasibility analysis. 2.2 Number of Comparables In preparing a feasibility study, the number of variables to be considered is large and the Member should be aware of the errors which may arise from using comparable transactions which require a significant number of adjustments. If an attempt is made to adjust for too many variables, the usefulness of the comparison may be destroyed. ..." 126At T332-333 Mr Phillips was directed to the "choice of comparables" passage above and gave the following evidence: Q. Does this statement in the guide [above] from your perspective bear any relationship to the way in which you treat comparable transactions when undertaking valuations? A. Most definitely. Q. In what way? A. Because it gives a guideline that you have to go to all the circumstances and there are examples there, ground conditions, different building specification, different planning constructs. It is fairly rudimentary and it is commonsensical that you need to take into account the factors when comparing sales. Q. If you are using a comparable which is not on all 4's with the property you are looking at is it necessary to make adjustments if you decide it is very comparable? A. My feeling is if a sale is not comparable it is disregarded. Q. Are there comparables you might need to make adjustments to? A. Yes, if they are relevant yes. Q. If it is necessary to make too much adjustments do you disregard it as a comparable? A. No, it just depends on the relevance in the matter. Q. If a sale is more than a year old you have said in general terms when dealing with these development sites. If it is more than a year old you disregard it as a comparable. What is there about that temporal disassociation that causes you to disregard it as a comparable? A. Because of changing circumstances of a market. 127Both Mr Rowlands and Mr Davis took into account "comparable sales" that went back 15 months rather than the 12 month cut off point as implemented by Mr Phillips. 128While the respective experts, Mr Davis and Mr Rowlands, differed as to the primacy to be afforded comparative analysis, there is no dispute that temporal and geographic differences affect and limited the reliability and usefulness of comparative sales. This valuation principle is similarly reflected in the guidelines. 129Mr Phillips' reason for rejecting comparative sales older than 12 months was because he regarded them as unreliable. In a recent case, Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd [2011] FCA 522, Barker J at [148] and [149] made it clear that there may be circumstances where it is inappropriate to rely on comparable sale which are older than, in that instance, 12 months from the date of valuation. 130The expert valuers, Mr Davis and Mr Rowlands, relied on one or two sales only, which were within the 12 month period (depending on whether one refers to the exchange date or settlement date). They are the Glo site and 16-20 Eve Street, Erskineville. 131So far as the criticism that Mr Phillips did not undertake searches is concerned, I accept that he did carry out some on his internal computer program and he decided that with only one comparable sale within the last 12 months that method was not reliable. Even if there were two comparables within the 12 month period, a sample of two is unreliable. The guidelines caution against using comparable transactions that require adjustment, as their usefulness may be destroyed. It is my view that this attests to the fact that Mr Philips engaged in a deliberate and considered approach that he would take into account comparable sales only within 12 month period and that the sample was too small for the comparative sales method to be reliable. Hence he used the feasibility analysis in carrying out the first valuation. 132Overall, Provident Capital's criticism of Mr Phillips not adopting the comparative sales approach is not persuasive. Mr Phillips' chosen method of approach to the Valuation was the same as Mr Rowlands, in that both regarded the feasibility analysis as the appropriate methodology where a development site has development approval (T257; T369). In the exercise of his judgment, Mr Phillips decided that there were not enough comparables to make the comparable sale method a reliable one to use. I agree with this view.

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(ii) The unit price ascribed to the individual apartments and the assumption made as to the number of presales 133Mr Phillips calculated the average unit price at the time of completion at $475,000 (as extracted from his report above). Mr Davis calculated the average price to be $461,000 and Mr Rowlands calculated it to be $465,000 (T502). Mr Phillips' calculation was about two to three percent less than Mr Davis and Mr Rowland's calculations. With 104 units these calculations amount to: Mr Phillips calculating $49.4M; Mr Davis calculating $47.944M (making a difference of $1.456M); and Mr Rowlands calculating $48.360M (making a difference of $1.040M). Mr Phillips calculated the total value of 194 units at about $1M to $1.5M less than Messrs Rowlands and Davis respectively. 134So far as presales are concerned, as previously stated, Mr Phillips calculated that 27 contracts were exchanged and 21 contracts were pending exchange. The total of both came to $22,898,500. He anticipated that 1 to 1.5 units would be sold each month during the 18 month construction period, so he calculated that at the time the construction period finished, the average sale price would be $475,000. In reality there had been no presales for six months prior to the valuation and Mr Phillip's evidence was that he assumed that the marketing of the units had ceased. 135Mr Davis calculated that were 26 exchanged presales and 21 awaiting exchange. Mr Rowlands calculated that there were 27 exchanged presales and 21 pending. 136All experts calculated the same number of contracts pending, namely 21. Mr Davis calculated 26 exchanged contracts, Mr Rowlands 26 and Mr Phillips, 27. This difference is slight and insignificant. 137Mr Phillips was asked if his assumption that the marketing has ceased goes directly to the reasonableness of the assumption that the presales would continue. He did not think so (T399.9). In other words he calculated the presales on the basis there was no marketing in place. This approach is logical.

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Assumption made as to construction costs 138There was no criticism made by the experts as to the amount Mr Phillips attributed to construction costs. He obtained that information from a quantity surveyor and Ms Gold.

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(iv) Using only one method of valuation 139Provident Capital submitted that the expert valuers in this matter both agreed that it is necessary that there be two methods of valuation to provide a "cross check" (T362). Mr Phillips agreed with this proposition (T256). However, Mr Phillips admits that only the one method of valuation, being a feasibility analysis, was adopted in the valuation (T256). According to Provident Capital, Mr Phillips, in performing the feasibility study of the property, which was in essence the only valuation method adopted in the valuation, failed to act reasonably and carefully. 140I accept that the guidelines suggest that a valuer use one or more valuation approaches (GN 9.0). However, where Mr Phillips' selection of comparable sales meant that methodology was unreliable, there was only one other method he could use, the residual site feasibility method. Messrs Phillips and Rowlands agreed that this was the more desirable approach. Neither Mr Davis nor Mr Rowlands suggested that another suitable method could have been used. In the circumstances, it is my view that Mr Phillips was entitled to use only one method of valuation but perhaps it would have been more appropriate to have pointed out to Provident Capital the limitations: because only one method was used, it was not possible to perform a cross check. Nevertheless, I have not reached the conclusion that Mr Phillips' approach was one where he failed to act reasonably and carefully. 141I shall express my conclusions on these matters shortly.

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Consideration of the second valuation dated 16 October 2005 142It is necessary now to consider what use should be made in relation to the second valuation. 143Provident Capital argued that the second valuation, which valued the property at $6.25M to $7M 10 months after the first valuation for $12M was evidence in itself of negligence and referred to MGICA (1992) Ltd v Kenny v Good Pty Ltd (196) 140 ALR 313 (at first instance), where it was said at 336-337: "In my opinion, even after giving full weight to the respondents' submission, which was supported by numerous concessions made by the valuers in their evidence, that value is to a substantial extent a matter of opinion, impression and personal taste and preference, and further that in considering whether a duty of care was breached one must be careful to put to one side the benefit of hindsight, it should be accepted that the true value of the property as completed as at 18 April 1990 was about $4 million. On this basis, Mr Kenny's figure of $5.5 million was a gross overvaluation and affords some evidence of negligence on his part." 144When the borrower defaulted on repayment, a second valuation was sought and obtained from Mr Phillips in October 2005. In the second valuation Mr Phillips valued the property as worth between $6.25M to $7M. 145Mr Baikie advised Mr Phillips that the presales were no longer relevant and so he had to disregard this factor in his valuation. Mr Phillips in his report dated 16 October 2005, adopted a different primary approach to valuation, namely a site value upon the basis of a direct comparison with limited sales and marketing indicators. The purpose of his evaluation was to assist in a possible sale of mortgagee in possession. 146The relevant part of this report is as follows: "...Initially, we have considered the Site Value upon the basis of a direct comparison with the limited sales and marketing indicators. The most relevant site currently available for sale is XX Botany Road which extends ... also have frontage to McEvoy Street, Wyndham Street and Retreat Street at Alexandria. This is an irregular shaped site of some 5,600 square metres which is vacant and partially excavated. It reportedly had Development Consent for one hundred and twenty three (123) apartments of one, two and three bedroom type plus some 1,800 square metres of retail and commercial accommodation on the ground and first floor level. The overall yield is reportedly equivalent to some one hundred and forty (140) apartments. This site is currently being marketed for a Mortgagee and we were advised of a standing bona fide high offer of $8,500,000 which reflects a rate of $60,714 per unit for a larger development and within a marginally inferior location which is affected by busy road frontage. We were further advised that a smaller redevelopment site at 104 Robey Street, Mascot is currently available for sale and that terms have reportedly been agreed at a purchase price of $3,200,000. This site of approximately 2,400 square metres has a Development Consent reportedly available for fifty four (54) apartments of basis one and two bedroom type and the prospective buyer will likely develop the complex as served apartments. The advised sale price reflects a rate of $60,000 per apartment site for a smaller project but one within a substantially inferior position which is very close to Sydney Airport with aircraft noise issues. The above would indicate that a marketable rate per unit in the range of $60,000 - $70,000 is achievable currently in respect of the subject property. The direct comparison evidence is quite thin but we were advised by marketing agents that there are buyers (although limited in quantum) within the marketplace for significant sites. This prospective buyers comprise mid size Builder/Developer companies as well as a number of serviced apartment providers who have entered the market recently given constricting site values. By way of an alternate Site Value methodology, we have addressed a residual site feasibility (hypothetical development) exercise per a computer generated Cash Flow Analysis spreadsheet. In this case, we have placed ourselves in the position of a notional Builder/Developer buyer and have taken a view that the market will improve in the likely project completion period of late 2006/2007 so as to support ready marketability of the notionally completed product in the latter construction period and post construction completion. Therefore, we have assessed reasonably achievable Gross Realisation levels relative to current sales data for the apartments to be produced and have deducted site acquisition costs, unit disposal expenses, estimate construction costs, interest and holding charges and a reasonable Development Margin to produce a Site Value with Development Consent available. We have adopted a reasonably bullish apartment absorption rate with marketing to be addressed during construction (from an onsite display apartment being the optimum strategy) and then a disposal completion with an overall two (2) year development program. In our consideration of achievable Gross Realisation (inclusive of GST) levels, we have had regard to the following sales data: ... Eve Street (corner Coulson Street, Erskineville ... ... Sydney Park Road, Erskineville ... ...Mitchell Road, Erskineville ... ... Marrickville Road, Marrickville ... Based upon the available date, in the subject matter, we have adopted potential Gross Realisation (inclusive of GST) levels (on average) as follows: ... We have further been instructed to provide a 'Forced Sale' assessment (Valuation 2) and in this case, we have appropriately discounted in the above Site Value to reflect a mortgagee sale and which is representative of reasonable auction 'Reserve Price'. In this case, we have adopted a rate of $60,000 per unit site and a Site Value ('Forced Sale') of $6,250,000 (Valuation 2). ... VALUATION We are of the opinion that fair and reasonable valuation information with regard to the Residential Redevelopment Site at Numbers 2-4 Coulson Street, Erskineville, New South Wales, 2043, is as follows:

[36]

The instructions in relation to the first valuation 149In order to determine whether or not Mr Phillips breached the duty of care he owed the Provident Capital it is necessary to return to the instructions given to him to ascertain the content of that duty. 150By letter dated 22 November 2004, Provident Capital instructed the defendants to provide an opinion as to the market value of the property at the date of the valuation. The instructions have been reproduced at [33], and I shall refer to them by number. I accept that shortly after receipt of these written instructions Mr Phillips spoke to Mr Roots of Provident Capital and Mr Roots informed him that he should provide a valuation on the basis of a site valuation with development consent for the project of 104 apartments. The information given in this telephone conversation formed part of Mr Phillips' instructions. 151Provident Capital pointed out that the defendants were told that when preparing a report. 152According to Provident Capital, these are the standard instructions that a reasonable valuer acting to the requisite standard of due care and skill would recognise as being requirements for a valuation for mortgage security purposes. 153In addressing (1) Mr Phillips, in the exercise of his professional skill and judgment, determined that reliable comparative sales in the area are those made within 12 months prior to the valuation. As there were none, he advised Provident Capital under the heading "Approach to Valuation" that, given the lack of appropriate site sales evidence relative to the current soft market conditions and reflecting the 46 percent presale proportion, they had addressed the site value (with development consent) upon the basis of a residual site feasibility (hypothetical development) exercise per a computer generated cash flow analysis spreadsheet. Mr Rowlands' evidence is that this was the preferred method to adopt in valuing the property. 154Mr Phillips addressed (2) and stated: "Given the level of presales, the subject would have reasonable appeal. The subject site is considered saleable at the provided valuation and to constitute a satisfactory basis for mortgage security, subject to confirmation of the pre-sales as bona fide and to those general provisions and disclaimers indicated". 155Mr Phillips addressed (3) and referred to the current off market conditions and said: "The medium density market within inner south Sydney had suffered from poor absorption rates in a general oversupply situation recently. The market of mid to late 2003 was sound with good sales rates noted, but interest rate rises and negative market sentiment late in 2003 caused the market to soften. Those poor market conditions have continued into year 2004 and the implementation of exist stamp duty on investment sales in mid 2004 has further damaged a soft market. Value levels have decreased generally and there is a potential for a further diminution in values in the short term, in our opinion. There are a significant number of new apartments available, under construction or 'in the pipeline' within the South Sydney area generally and we can highlight the areas of Green Square, Waterloo and Zetland where oversupply is in evidence. A project such as the subject would be difficult to support in a normal context, but we do acknowledge that the significant pre-sales evident to date has motivated our more favourable consideration". 156Mr Phillips also addressed (5), (7), (8) and the ancillary instructions. Mr Phillips' did not refer to instructions (2) and (6). Question (2) asked how long the property had been on the market. This question was not answered but nothing turns on this. Question (6) is not relevant as the property was not to be rented out and only had two dilapidated buildings on it that were intended to be demolished. In my view Mr Phillips properly addressed the relevant matters referred to in the instructions. 157A valuer is entitled to exercise his professional judgment in carrying out a valuation. As Mr Davis explained, the task of valuations is "an art not a science". I have examined Provident Capital's criticisms of Mr Phillips' first valuation at [88]. None of these complaints were made out. The guidelines support Mr Phillips' approach that where there are only a small number of comparable sales, the comparative method is not appropriate. While Mr Phillips applied a more favourable value to the unit price in the feasibility studies, the difference was only one to three percent from those of the two expert valuers. Valuation is not an exact science and this different margin is not significant overall. 158It is my view that Mr Phillips exercised all reasonable care, skill and diligence that would be expected from a competent valuer when he prepared the first valuation in accordance with the instructions he was given. Mr Phillips exercised reasonable care and skill when he valued the property at $12M, proceeding as he did on the disclosed assumption that the presales were bona fide. The valuation was well within the reasonable range or "bracket" of values that are prima facie not negligent: Hann Nominees Pty Ltd v National Australia Bank Ltd at [29]; Adwell Holdings Pty Ltd v Smith at [9]. To the extent that the instructions furnished to Mr Phillips informed the content of the duty of care (Kenny & Good Pty Ltd v MGICA at [116]), Mr Phillips complied with those instructions.

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Causation 159The property was worth about $12M at December 2004 (Mr Rowlands put its value at between $11.5M and $12.250M). Provident Capital was to advance 66 percent of the amount of the first valuation. Provident advanced $7.920M, being 66 percent of that amount. In these circumstances, the defendants did not cause Provident Capital to suffer any loss. Even with the valuation, Provident Capital elected to provide a further $1M advance for the purchase of the property. Provident Capital accordingly lent more than 66 percent of the valuation amount. 160Assuming I am wrong in finding that Mr Phillips did not breach his duty of care to Provident Capital, I shall briefly refer to Provident Capital's submissions on causation. 161The first submission repeats an attack on Mr Rowlands' credit. I have already dealt with this issue and found the attacks on credit to be without substance. 162The plaintiff's second submission was that the true value of the property as at December 2004 was between $8 and $9M, consistent with the evidence of Mr Davis. Counsel for Provident Capital submitted that Mr Davis' approach is to be preferred to that of Mr Rowlands and Mr Phillips because the use of comparable sales evidence is the most widely accepted method of determining the market value of land: Redeam Pty Ltd v South Australian Land Commission (1977) 40 LGRA 151 at 156. This method was described by Stephen J in Riverbank Pty Ltd v Commonwealth (1974) 48 ALJR 483 at 484 as "the conventional valuation technique", and in Bickle v Cmr of Main Roads (1961) 7 LGRA 155 at 159 as the most direct method. For reasons given earlier under "Expert Evidence", I prefer the evidence of Mr Rowlands to that of Mr Davis. Both Mr Phillips and Mr Rowlands agreed that where 104 units were to be built and development approval had been granted, the feasibility method was the most appropriate. In the circumstances, I preferred their evidence for the reasons I have given earlier. 163In summary, the defendants did not cause the plaintiff's loss because Mr Phillips' valuation was accurate. 164I accept that if Mr Phillips' valuation was wrong, and Mr Davis' valuation of $8 to $9M was correct, it is unlikely that Provident Capital would have proceeded with the loan. If this were the case, Provident Capital would have lent MMT no more than 66 percent LVR, which equates to about $5.33 to $6M on a property valued at $8 to $9M. MMT, even with an $8M loan, needed to obtain additional funds from Capital Access Holdings, as well as provide some of the purchase price in the form of units in the completed developments. It is therefore unlikely that MMT would have been in a position to proceed with a smaller loan of $5.33 to $6M, and the transaction the subject of these proceedings would never have taken place. Obviously, questions about whether Provident Capital had examined the bona fides of the presales would never have arisen.

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Reliance 165Assuming I am wrong in relation to breach of duty of care and causation, I will consider whether Provident Capital relied upon the valuation in order to lend the funds to MMT and whether its reliance was reasonable. 166It was not in contention that Provident Capital did in fact rely on Mr Phillips' first valuation in providing the loan to MMT. The live issue is whether that reliance was reasonable. In Ta Ho Ma Pty Ltd v Allen [1999] NSWCA 202, Giles JA observed at [24]: "If the reliance of the particular financiers is unreasonable, it will normally follow that the criteria for a duty of care owed to the financier is not satisfied". Giles JA further noted: "If the valuer knows or intends that the plaintiff as a particular person will rely on the valuation, even unreasonably, different considerations of course arise". There is no suggestion in this case that the defendants knew or intended that the plaintiff would rely on the valuation in circumstances where to do so would be unreasonable. 167On 2 March 2005, Provident Capital advanced $7.92M to MMT, which represented just over 66 percent of the valuation. It lent a further $1M, which took the amount lent on the property to above 66 percent. 168It is necessary that I now refer to Provident Capital's position in the lending market and its lending practices. Messrs Bayly, O'Sullivan, Turner and Finn addressed these issues. 169Mr Donald Bayly gave general non-contentious evidence in relation to the practicalities of the loan approvals both from the borrower's and the lender's perspective. Usually asset lenders would approach each transaction by identifying a number of basis principles so as to avoid the risk of default. They would take a number of steps in order to mitigate against the risk of default. This mitigation could be achieved in a variety of ways across the lending spectrum. For example, by way of analogy, the taking of a guarantee in transactions could be for a variety of purposes and might have been done in a variety of situations, but each would be to achieve a mitigation of the risk of default. 170Mr Bayly said that a traditional lender, such as a bank, would normally take a guarantee from a guarantor in circumstances where it had conducted extensive investigations into the ability of a guarantor to meet the primary debt, should he or she or it be called upon to meet it. This guarantee would often be supported by way of a charge over an asset. 171However, at the other end of the lending spectrum, a non-bank lender would not necessarily look to take a guarantee from a guarantor, but would take a guarantee from a director or entity related to the borrowing entity, so as to achieve leverage on the controlling mind of the borrowing entity, such that they were exposed to primary liability for the debt themselves in the event of default by the borrower. It would not be normal for a non-bank lender necessarily to evaluate whether or not the guarantee was worth anything at the end of the day. The real mitigation against the risk was to ensure that the related entity to the corporate borrower would be subject to the direction of the lender. 172In or about early 2000s it was usual practice among many lenders to "asset lend". The basis for this approach to lending was that at the time property prices were steadily increasing. The value of the asset would likely have increased within the term of the loan such as to create a greater equity buffer, so as to minimise the risk of any loss. On this basis many lenders, traditional or otherwise, were content to lend on the value of the asset alone and did not make extensive enquiries into the ability of a borrower to service a loan, especially on a transaction of this type. 173I accept that Provident Capital's loan to MMT was an "asset lend" because MMT was not in a position to make periodic interest payments. The interest payments were made up front. There was no persuasive evidence that MMT had made a pursued upon approval for a construction loan prior to funds being advanced. The best there was was a letter from St George Bank. However, I accept that during the period of the loan it was thought MMT would pursue the grant of a construction loan in the marketplace during that initial month period of the loan. Provident Capital had made it clear to MMT at the outset that it was not interested in financing its construction loan. Mr O'Sullivan's evidence was that he was of the opinion that MMT would be able to obtain construction finance from an entity like Suncorp. 174Provident Capital sought to satisfy the Court that the evidence of Messrs O'Sullivan and Turner demonstrated that the approval of the loan was conditional on a satisfactory valuation, and that the valuation was obtained and considered before the relevant transaction was approved. The defendants submitted that Provident Capital did not place enough importance on the bona fides of the presales and that caused its loss.

[39]

The importance of the bona fides of the presales 175Provident Capital submitted that nowhere in the valuation was there a comment that the presales were not at market, or that without the presales the property would be marketable at a greatly reduced value. 176The defendants submitted that any reader of this valuation, with valuation expertise or not, would be left in no doubt that if the presales were not confirmed and/or secured, the assessment of value by the defendants might be different. 177In the first valuation report, Mr Phillips made the following references to presales: "We have proceeded upon the basis that these pre-sales are confirmed as bona fide by your legal advisors"; "In this case, we have assessed an achievable gross realisation primarily defined by the pre-sales to date and have deducted"; "The site value has been approached upon a sensitivity basis considered to be marketable incentives in the current market conditions given the level of presales to date"; "A project such as the subject would be difficult to support in a normal context, but we do acknowledge that the significant presales evident to date has motivated our more favourable consideration"; "We have proceeded upon the basis that the sales that are exchanged or have exchanges pending are bona fide and can be confirmed as such by the lender's legal advisors, with this course of action recommended"; "Given the level of presales, the subject would have reasonable appeal"; "The subject site is considered saleable at the provided valuation and to constitute a satisfactory basis for mortgage security, subject to confirmation of the presales as bona fide and to those general provisions and disclaimers indicated" (emphasis added). 178It is also necessary to consider the expert evidence on this topic. Mr Stephen Turner has been employed by Provident Capital since November 2009 and is the head of the credit and lending department of Provident Capital. Prior to 2009, he worked for the St George Bank as senior unit manager, specialised mortgage solutions. Mr Turner, who is employed by Provident Capital, gave evidence. No submissions were made that because Provident Capital employed him he could not give impartial evidence and I accept that he did give independent evidence. 179Mr Hugh Finn is a certified practising accountant and was employed by the Commonwealth Bank in its lending-related area or a credit risk department of the bank. At the relevant time he was not actively involved in deals or transactional lending. He was in the policy-making or financial accounting area of the credit risk department. The last time that he was involved in transactional lending was in around 2001/2002. It would be fair to say that his experience was that of a traditional lender, and his evidence has to be evaluated in that light. 180Two experts, Messrs Turner and Finn, gave evidence in relation to what a prudent lender should have done before advancing the funds to MMT. They provided a joint report after holding a conclave (Ex D). 181Messrs Turner and Finn disagreed as to the amount of due diligence that should have been completed by Provident Capital on the bona fides of the presales that John Virtue used as a means of setting the gross realisation in its project feasibility. 182Mr Finn believed that, notwithstanding the Provident Capital loan was a bridging loan to assist in the purchase of the development site, it was fundamental that Provident Capital complete due diligence on the presales to ensure that they were genuine purchasers. This confirmation would have also included legal verification as to the general robustness of those contracts and the absence of means for intending purchasers to readily avoid their obligations. Mr Finn was of the view that the impact of presales in the circumstances was very significant, given the weight attached to presales in the December 2004 valuation by John Virtue and that presales would have influenced the availability of construction finance and thus Provident Capital's potential source of takeout. 183Mr Turner believed that the loan provided by Provident Capital was a bridging loan to assist in the purchase of the property and that the instruction to John Virtue was to value the property "as is". Mr Turner says that had Provident Capital considered providing construction finance, then a more comprehensive due diligence of the project feasibility, including presales, would have been appropriate. 184The evidence of the valuers is clear - without the presales, the value of the property would have been less. Both expert valuers also gave evidence that their opinion would change if there had been no presales (both at T381). 185Mr O'Sullivan also confirmed this at T142-143 and T147: Q. And if the pre-sale weren't there you would have to reassess the value and reassess the transaction? A. Potentially, yes. ... Q. If there was an issue as to the viability of the pre-sale contracts you would agree this would be a matter to remit to the valuer to consider the valuation afresh? A. Yes. 186In cross-examination Mr Turner stated (T448-452): Q. You understood the valuer saw the pre-sale contracts as being significant in his valuation? A. Look, I mean having read a number of valuations it's not an unusual clause for a valuer to put in a valuation. Q. I'm just asking you as an expert, can you answer my question. When you read this valuation you would have seen the valuer placed a significant store on the presence of pre-sale contracts. Would you agree with that? A. Yes. ... Q. If you go down, 2 paragraphs down...Again, there's no doubt that he is placing significant store on the pre-sales and counsel that that they be confirmed, do you agree with that? A. Yes, I agree with that. That line, yeah. Q. The next 2 paragraphs. HH. Do you agree? Q. I agree. ... Q. Coming back to what I suggested to you earlier, would you agree with me Mr Turner, that it is clear on any reading of that valuation that the valuer placed significant emphasis on the presence of pre-sales in terms of assessing value? A. In this valuation the valuer has made a number of references to pre-sales as being fundamental to the value, yeah. 187Mr Bayly expressed the opinion that non-bank lenders were less likely to demand presales as a prerequisite to the loan proceeding than traditional banks. He was of the view that they would, however, be very interested in any existing presales as a measure of the potential pricing and saleability of the project. Many developers regard presales as an impost on their ability to sell the end product as it tends to cap the upside potential of the project. Further, presales often come via project marketers and can be of doubtful value. 188According to Mr Bayly, for those reasons, the prudence, or lack thereof, of accepting a presale with a component of trade dollars was not necessarily a major consideration that traditional or non-bank lenders would take into account. While this may reflect the general approach, it ignores the specific warning given by Mr Phillips as to the importance of the bona fides in relation to this particular valuation. 189As previously stated, in its own evaluation of the valuation noted under the heading, "Has the valuer commented on any adverse findings likely to affect the security or saleability", Provident Capital noted "Yes" and added "Has commented that due to slow down in market need to ensure that presales are in place!" 190The following handwritten notes by Provident Capital appear at the bottom of the valuation certificate: "BP (Berstein Pain solicitors) have been instructed to confirm (i) That contracts are unconditional (ii) That deposit are held in trust (iii) That contracts cannot be cancelled without our written consent and (iv) That deposits cannot be released without our [indecipherable]. 191On 16 December 2004, Provident Capital instructed Berstein Pain solicitors after the valuation was received to seek confirmation that the presales were actually in place. 192On 17 December 2004, Berstein Pain sent a fax to Konstan Lawyers seeking, first, confirmation that the contracts which had been issued were unconditional aside for the completion of the project; secondly, that the deposit relating to each of the contracts was being held in the trust account; and thirdly, that the deposits would not be released without the prior written consent of Provident Capital and that no contracts would be cancelled, terminated or rescinded without the prior written consent of Provident Capital. 193Mr Phillips, in his valuation, drew to Provident Capital's attention and Provident Capital was aware that due to the slowdown in the market it should ensure that the presales were in place and the sum of $12M being a fair and reasonable valuation was subject to confirmation of the pre-sales as bona fide. 194On 2 March 2005, Stan Roots wrote a file note. It reads: "Telephone conversation between MOS (Michael) and Tim Dewhurst [of Capital Access Holdings]. MOS advised Tim that of the 24 sales 17 were deposed by way of "trade dollars". Also Tim confirmed that the 2nd mtgee only held mtge over Erskineville site (behind provident) for their loan and that they would confirm, in writing, of settlement. Follow discussions it was agreed to proceed to settlement." [MOS is Michael O'Sullivan, Director of Provident Capital] 195Mr O'Sullivan's evidence is that on 2 March 2005 (the date of settlement of the loan) he was aware that 17 of the 24 presales were deposits held by way of trade dollars. Nevertheless, he agreed that the transaction should proceed to settlement. 196On this topic, I have reached my own conclusion. Mr Phillips made many references to the importance of the presale being bona fide in his report. Provident Capital evaluated this issue as being an important one. Provident Capital had taken notice in its internal evaluation that there had been a slowdown in the market and that this could adversely affect the security or saleability of the property market. John Virtue had cautioned Provident Capital that because of the slowdown it was important to ensure that the presales were in place. The valuer made it abundantly clear to Provident Capital that it was important to check the presales were bona fide and that the bona fides of the sales affected the valuation figure. Once that had been done it was up to Provident Capital to verify the bona fides of the presales. They, not the valuer, were in a position to find out the true position with regard to the presales. Provident Capital decided to proceed with the settlement of the loan when 17 out of 24 contracts were in trade dollars. Provident Capital's reliance on the valuation, in circumstances where it proceeded with the loan despite knowing that most of the contracts were in trade dollars, was unreasonable. 197The defendants say that another reason that any loss was caused to Provident Capital was because Provident Capital did not properly evaluate the effect of the sunset clauses contained in the contracts of sale.

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Sunset clauses in the contracts 198According to a file note by Bernstein Pain, the existing contracts of sale were to be rescinded and reissued in the name of MMT. This never happened. Mr O'Sullivan was of the view that the deed of assignment entered into between Provident Capital, Toubia and MMT covered those contracts and bound the purchases regardless whether they were in the name of Toubia or MMT. 199Provident Capital proceeded to enter into the loan agreement and advance loan funds to MMT under the assumption that the presales would follow MMT. While Provident Capital's assumption may have been erroneous, counsel for the defendants submitted that this does not make its reliance on the valuation reasonable. 200The defendants submitted that on the basis of the sunset clause for the presale contracts being either 1 December 2005 or 30 June 2006, Provident Capital knew that the sunset clause would either: operate and potentially jeopardise the existence of the presales contracts or in the alternative provide a very tight time in which to undertake the project before operation of the sunset clause. 201Mr O'Sullivan at (T145-147) conceded that there was "potential" for the sunset clauses to operate and if so this would affect the value. 202It is not clear whether the sunset clauses should have been interpreted in the manner for which the defendants contend. Mr O'Sullivan's statement above is correct. I do not regard Provident Capital's reliance on the sunset clauses as unreasonable. 203However, once Provident Capital confirmed that 17 of the presales were in trade dollars, it made its own decision to go ahead with the loan. Either Provident Capital no longer relied on the valuation, or it was unreasonable to rely on the valuation when it accepted trade dollars in relation to the presales. 204As I have made findings that the defendants did not breach their duty of care and did not cause Provident Capital to suffer loss, the defendants were not negligent. The claim in negligence fails. It was not reasonable for Provident Capital to rely solely on the valuation when it lent a further $1M, meaning that a sum of over 66 percent of the valuation was lent, and when it accepted deposits on presales in trade dollars. For the same reasons, the claim under the Trade Practices Act for misleading and deceptive conduct also fails.

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Damages 205In case I am wrong in finding that the defendants were not negligent in preparing the valuation, that the valuation did not cause the loss, and that Provident Capital was not entitled to rely on the valuation, I turn to consider the damages claimed by Provident Capital. 206While Provident Capital achieved a sale on the property of approximately $12.5M on 22 November 2008, it says that this was after substantial demolition works and the commencement of other works it was obliged to expend funds on in order to carry out this work. 207So far as the recovery expenses are concerned, there does not appear to be a dispute that they were reasonably incurred. The buildings on the property had to be demolished to keep the development application in force. This had to be done before the property could be sold. Nor, it appears, is there any dispute that the sum of $7.8M was lent to MMT and that interest accrued at 18 percent for 12 months ($1.404M) and legal costs of $25,000 were incurred. The sum of $10,405,965 is not in dispute. What is in issue is whether Provident Capital should be compensated for the loss of the use of the moneys loaned to MMT. 208Provident Capital sought to satisfy the Court that had the defendants not negligently valued the property, the loan would not have been written and that instead of lending to MMT, Provident Capital would have loaned the money to another borrower. It sought to demonstrate that lending to another borrower would have likely resulted in a loan without default, by referring to its rate of default on loans in 2005/2006 of 0.1 percent. 209Provident Capital's claim for damages is for loss of commercial opportunity. In support it referred to Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332, where the High Court considered this type of claim for damages. At 349 Mason CJ, Dawson, Toohey and Gaudron JJ discussed the way in which contract law recognises that a loss of an opportunity is compensable. Where a claim is made for the loss of a commercial opportunity, the Court must, before it awards damages in respect of such a claim, be satisfied on the balance of probabilities that a commercial opportunity of some value was lost. Once that is done the Court assesses the value of the opportunity by reference to the degree of probabilities or possibilities (at 355 per Mason CJ, Dawson, Toohey and Gaudron JJ; at 368 per Brennan J (as his Honour then was)). In Sellars v Adelaide Petroleum NL, the High Court held that the trial judge was correct to make an award of damages in favour of the applicant for the loss of an opportunity to proceed with an alternative commercial transaction that had a 40 percent chance of proceeding to settlement. 210In Tabet v Gett [2010] HCA 12; (2010) 240 CLR 537, Kiefel J (with whom Hayne and Bell JJ agreed) referred to Sellars v Adelaide Petroleum NL and said (at 581 [124]) that if providing an opportunity provides a substantial and not merely a speculative prospect of acquiring a benefit, it can be regarded as of value and therefore as loss or damage. 211Further, in the recent Full Federal Court decision of La Trobe Capital & Mortgage Corporation Limited v Hay Property Consultants Pty Ltd [2011] FCAFC 4 the Court stated that the proper manner of approach is to award interest at a rate which would place Provident Capital in the position it would have been in if the tortious conduct had not occurred. That is, affording Provident Capital a rate of interest on the funds it would not have lent to MMT reflecting Provident Capital's normal return from the investment of its funds for the three years that it was without it. Provident Capital says that if it had invested moneys in February 2004 on a first mortgage security for a period of three years it would have obtained an average return of 14.19 percent. This rate reflects a figure between 17.25 percent (the higher rate on the loan) and 11.15 percent (the lower rate on the loan). 212Provident Capital submitted that the way in which Provident Capital's funds are managed meant that the monies set aside to lend to the borrower in this transaction would have been lent very swiftly to another borrower. 213Their claim for damages entails: Net funds loaned $7,149,720 TB 1130 - 1136 Recovery expenses: $3,256,244 TB 771, 890, 891, 954, 989 - 990, 100 - 1007, 1008, 1116 - 1120, 1130 - 1136 Sub total $10,405,965 Foregone income at 14.19% on net funds loaned $3,495,956 (3 years, capitalized annually) TB 745, 970, 972, 1014, 1026, 1028, 1070, 1071, 1073 Foregone income at 14.19% on recovery expenses $462,061 (1 year, capitalized annually) TB 745, 970, 972, 1014, 1026, 1028, 1070, 1071, 1073 Total cost: $14,363,982 Less recovery: $12,506,720 TB 1046 - 1048 Net amount: $1,857,262 Plus court interest $566,248.65 Civil Procedure Act (NSW) 2005 s 100 Total claimed $2,423,510.65

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214There is a summary of Provident Capital's balance sheet for the nine months from March 2005 to December 2005 which is summarised in the following table (TB 433-734): Period Debenture Holders Funds Loans Cash on Hand Cash % of Debentures March 2005 $229,711,709 $211,003,643 $30,998,088 13.5% April 2005 $228,924,715 $208,211,266 $32,238,667 14.1% May 2005 $228,520,773 $207,853,998 $31,695,309 13.9% June 2005 $221,469,015 $213,680,514 $24,630,305 11.1% July 2005 $222,764,638 $213,485,396 $21,817,350 9.8% August 2005 $229,880,758 $217,933,932 $23,059,358 10.0% September 2005 $227,097,051 $217,665,962 $20,231,388 8.9% October 2005 $224,882,267 $211,038,306 $23,670,028 10.5% November 2005 $220,062,556 $204,150,128 $24,335,251 11.1% December 2005 $217,825,401 $195,927,131 $29,326,960 13.5%

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215I accept that Provident Capital's lending patterns remain consistent annually throughout the relevant period. 216The defendants submitted that from the above the following can be gleaned: (1) At the end of the month of the subject loan, Provident Capital had $31M cash on hand. (2) The amount of cash on hand for the subsequent two months was greater than the cash on hand in March 2005, notwithstanding the subject advance - in other words, it had more cash to lend. (3) Provident Capital was, at the very least, prepared to lend to a level where cash on hand reduced to $20M - or 8 percent of debentures held. There is no evidence that Provident Capital would have limited its lending such that cash on hand was no less than $20M or 8.9 percent of debentures held and no inference can be drawn that this was the case. (4) As at the end of March 2005, Provident Capital had cash on hand available for further loans. 217The defendants submitted that having regard to the above, it could not be said that Provident Capital was deprived the opportunity of using the loan funds for the subject loan transaction on an alternative loan - in the context of the Angas v Valcorp [2011] FCA 190; [2011] 277 ALR 538 authority, the defendants submitted that: "There is no evidence that the Plaintiff lost the opportunity to make loans on its usual terms because it did not have sufficient funds available." 218And in La Trobe Capital & Mortgage Corporation Limited v Hay Property Consultants Pty Ltd [2011] FCAFC 4, Finkelstein J at [96] considered a claim of this nature and summed up the position by stating that a plaintiff must establish that: "...there were more potential borrowers than money available and La Trobe (the lender) could not satisfy the demand of potential borrowers." 219So far as the claim for foregone income is concerned, the loan to MMT was initially for a six-month period. It was extended for a further 90 days (three months). I accept Mr O'Sullivan's evidence that he would have lent the funds allocated to MMT to another borrower. There was a substantial and not merely a speculative chance of this event occurring. While I accept that Provident Capital lost an opportunity to proceed with an alternative commercial transaction or transactions as assessment of that lost opportunity, it depends on a number of factors. In order to loan those funds earmarked for MMT over the period of three years, there would have had to have been potential borrowers seeking those funds; as loan in default was for a period of six months with a three-month extension, it is likely that more than one loan would have need to be approved over the three-year period. The borrowers would have to have been able to satisfy the criteria required by Provident Capital for the advance of those funds and the borrower would have to have proceeded with the loan to settlement. It is not possible to be precise with this calculation in relation to the likelihood of successful alternative transactions, but taking these factors into account I would allow a 50 percent chance that there was an alternative loan or loans that would have proceeded to settlement. I would allow half the amount claimed under this head of damage. Provident Capital during this period had an almost negligible default in repayments during that time. I would allow the whole amount claimed for foregone income at 14.19 percent on the recovery expenses and I would allow an amount for court interest.

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Contributory negligence 220Once again, if I am wrong in relation to breach of duty of care, reliance and causation, I have summarised the argument on contributory negligence but I have not come to a view. 221Counsel for Provident Capital submitted that it is not guilty of contributory negligence as in assessing the loan they employed the standard of lending practices employed by reasonable lenders, when lending bridging finance on a land bank on an inner-city development site in 2005. Such lending practices involve the taking of reasonable precautions so as not to incur economic loss, based on its knowledge of the risks inherent in transactions, which it actually held or ought to have held. 222They relied on the case of Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) Aust Torts Reports 80-757 where the plaintiff lender was induced to enter into a risky loan transaction on the basis of the defendant's property valuation. The valuation had grossly and negligently overvalued the property. Clarke J, in the NSW Supreme Court, rejected the defendant's plea of contributory negligence, finding that the decision to lend was not induced by any carelessness on its part. 223The defendants disagreed and submitted that Provident Capital's failure to act as a reasonably competent, responsible or prudent lender in the circumstances of this transaction was wholly or in partly causative of Provident Capital's alleged loss. They submitted that there were a number of indicators during Provident Capital's consideration of the loan application that made it imprudent for a reasonable lender to approve it. The defendants relied on the evidence of Mr Finn. 224The defendants stressed that they did not seek to criticise Provident Capital's business model at large, as the issue relates only to this specific loan approval process. Mr Finn stated (T419-420): "The plaintiff's business model isn't going to be wrong in all circumstances. However, the plaintiff's execution of this particular loan transaction in my view, the loan should never had been written because of the way they went about evaluating this particular loan application. That is a separate issue as regards their business model. Their business model might have been equity in 90 out of one hundred crossing their desk, in this particular one it is my view had they gone about evaluating and implementing the loan in an orderly manner they would have reached decision points on the way through which would have caused them to say we are not going to proceed". 225The defendants referred to the lucrative nature of the deal and how this could have motivated Provident Capital. In the period before the default they made $1.116M. Mr O'Sullivan agreed that when he lent MMT the money he knew it was not in a position to pay the interest obligations that flowed from the debt it incurred (T74.33-47): Q. So when you lent them money you knew this was a company that was not in a position to pay the interest obligations that flowed from the debt it incurred with you? A. Correct. 226Provident Capital further submitted that it is a "non-conforming" lender or an "asset-based lender". As such they relied on the value of the security and serviceability was a secondary consideration. The defendants referred to Mr Finn's affidavit where he gave evidence that he believed the loan application ought not to have ever reached the stage of valuation. A reasonable lender would have had concerns that the company: had no capacity to complete the financing required; had no capacity to meet its debts as they fell due; and had no viable exit strategy for the proposed loan. A reasonable lender therefore would have rejected the loan or postponed the decision until it was appropriate. 227When MMT became purchaser/borrower, it appears that a new purchase price for the property had been negotiated at $10,765,500. Mr Finn expressed the opinion that a reasonable lender applies its lending ratio to the lesser of the purchase price or valuation. In the circumstances of this transaction, Provident Capital ought to have applied its 66 percent lending ratio to the purchase price of $10,765,500 and this would have resulted in a maximum loan advance of $7,105,230. 228In cross-examination Mr Turner conceded that there was a shortfall in funds, which a prudent lender would make enquiries about, and that there was also another set of figures in the disclosure document, which should have been addressed. He stated (at T429): Q: In terms of your experience in the lending context, would it be your experience that a lender would be, firstly, concerned to ascertain why what was being proposed in the disclosure document didn't ultimately end up being what happened at settlement? In other words, they want to know, to use the vernacular, what was going on? A: Look, it's always important for a lender to have an understanding of how the ultimate transaction of a purchase will prevail. 229Further, in cross-examination regarding the exit strategy, Mr Turner stated that presales were mentioned in the offer letter, as they would assist in obtaining construction fees (as an exit strategy). Mr O'Sullivan stated the following (T444-445): Q: But for it to be a realistic exit strategy a prudent lender would make some investigation as to the reality of whether construction finance would be available. You would agree with that? A: Yes. Q: That is to find out what had been done in terms of obtaining construction finance. Correct? A: Yes. Q: And making an inquiry probably before the point of settlement as to where are you at with your construction finance? A: Yes. I mean there would need to be or want to be some idea that something is cooking in relation to construction refinance. Q: You would want to see some documents, that sort of thing. You agree with that? A: Yes. 230In relation to Capital Access Mr O'Sullivan conceded that he did nothing to check their capacity to repay the extra $1M (T127). Mr Turner also stated he would expect that Mr O'Sullivan would have had sufficient documentation to justify that they had the financial wherewithal to come up with further funds (T446). 231Provident Capital also argue that criticisms of an alleged failure to adhere to lending policies are irrelevant as this is not an action brought pursuant to ameliorative legislation such as the Contracts Review Act 1980. They refer to Mason J in Commissioner of Railways v Ruprecht [1979] HCA 37; (1979) 142 CLR 563 at 570. Consequently they conclude that the defendants have not demonstrated that Provident Capital failed to act in a reasonable and prudent manner in mitigating the foreseen risks. Rather, Provident Capital says that the defendants' plea is more a criticism that Provident Capital failed to act as a conservative traditional lender might act. 232As I have found that the plaintiff's claim in negligence fails, I have not found it necessary to reach a concluded view on this issue. However, I note that Provident Capital's failure to inquire into whether MMT had taken steps to obtain construction finance would be relevant to any assessment of contributory negligence. The plaintiff's decision to lend MMT a further $1M in excess of 66 percent of the valuation would also be relevant.

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Conclusion 233In summary, my conclusions are that the defendants did not breach their duty of care to the plaintiff. The defendants did not cause Provident Capital's loss. Provident Capital's reliance on the defendants' valuation was unreasonable. Hence, the defendants were not negligent, so the claim in negligence fails, as does the claim under the Trade Practices Act. 234The result is that the plaintiff's claim fails. 235I enter a verdict and judgment in favour of the defendants. 236Costs are discretionary. Costs normally follow the event. The plaintiff is to pay the defendants' costs as agreed or assessed.

[46]

The Court orders: (1) Verdict and judgment entered in favour of the defendants. (2) The plaintiff is to pay the defendants' costs as agreed or assessed.

[47]

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: 13 April 2012

Provident Capital Limited v John Virtue Pty Ltd

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