Xabregas v St George Bank - A Division of Westpac Banking Corporation

Salient Facts

1. Before turning to the evidence concerning the matters of which the plaintiff complains, some matters of background should be recorded.
2. The property (Lot 2) is one of only two lots in the strata plan which was registered on 22 August 2007. It has a unit entitlement of 15. Lot 1 has a unit entitlement of 20. Lot 1 includes the lower level of the building. Lot 2 includes the upper level of the building. An attic area above Lot 2 (which is part of the common property, not of Lot 2 itself) can be reached by way of stairs from Lot 2. It has been used as a bedroom for many years. An exclusive use by-law was passed and registered in 2012 that gave the owner for the time being of Lot 2 exclusive use and enjoyment of the attic space.
3. The Bank's mortgage over Lot 2 was given in 2008 in connection with a loan to the plaintiff and Mr Marcos (to whom the plaintiff was then married) of $1,243,000. The loan fell into arrears in 2011. The Bank issued a default notice pursuant to s 57(2)(b) of the Real Property Act on 27 May 2011. The Bank commenced possession proceedings in May 2012.
4. An agreement was reached between the Bank and the plaintiff in October 2012 (following the involvement of the Financial Ombudsman Service) whereby the plaintiff agreed to make monthly payments of $2,000 until April 2013 when an amount of arrears of $176,774 was to be paid, with the contractual minimum monthly payments to apply thereafter. It appears that the monthly payments of $2,000 were paid until March 2013 but the arrears due in April 2013 were not paid. No payments have been made in reduction of the mortgage debt since March 2013.
5. The plaintiff voluntarily gave possession of the property to the Bank in about July 2013. The mortgage debt was about $1.45 million at that time.
6. The strata scheme has been the subject of much dispute and litigation involving the plaintiff and Ms Susan Moallem, who became the owner of Lot 1 in February 2008. As described by White J in Moallem v Consumer Trader and Tenancy Tribunal [2013] NSWSC 1700 at [7], there was a falling out between the plaintiff and Ms Moallem that "led to multiple proceedings of nightmarish complexity". In August 2010 a strata managing agent was appointed pursuant to s 162 of the Strata Schemes Management Act 1996 (NSW) to exercise the functions of the owners corporation.
7. In simplified terms it appears that: 1. Ms Moallem commenced proceedings in the Consumer, Trader and Tenancy Tribunal ("the CTTT") complaining that works in relation to the attic space were unauthorised and should be removed. She was successful in obtaining orders authorising the owners corporation to remove the work; 2. The plaintiff then commenced proceedings in this Court seeking rectification of the strata plan to include the attic space as part of Lot 2, an order requiring the owners corporation to consent to a development application and a building certificate application, and a stay of the orders of the CTTT. These proceedings were settled by a Deed dated 14 October 2011. The Deed provided for steps to be taken towards the registration of an amended strata plan that would include the attic space within Lot 2; 3. In October 2013 (after the Bank had gone into possession of Lot 2 and had commenced taking steps to sell it), Ms Moallem commenced proceedings ("the 2013 proceedings") in this Court seeking relief in relation to purported resolutions of the owners corporation, in particular a resolution imposing a special levy on Lot 1.
8. The Bank was named as the fifth defendant in the 2013 proceedings. On 5 November 2013 White J directed that if the Bank proposed to enter into any contract for the sale of Lot 2 exercising its power as mortgagee, it had to give the parties at least five days notice of that intention.
9. Shortly thereafter the plaintiff (who was named as the third defendant in the 2013 proceedings) foreshadowed the filing of a Cross-Summons for specific performance of the Deed of 14 October 2011. This matter was raised at a directions hearing before White J on 22 November 2013. A question was raised about whether the Bank might itself seek to have an amended strata plan registered. A solicitor appearing for the Bank on that day informed the Court that the Bank intended to "take steps to ultimately perform the Deed". It is not clear what was meant by that statement as the Bank is not a party to the Deed (and was not proposed to be a party to the Cross-Summons). In any event, in light of the statement of intent by the Bank, the question of the Cross-Summons was adjourned until February 2014, seemingly on the basis that if the Bank succeeded (where Dr Xabregas had not) in getting an amended strata plan registered, then the Cross-Summons would fall away. The Cross-Summons was, however, filed.
10. The Bank was thereafter involved in attempts to have an amended strata plan registered. In November 2014 the Bank sought the consent of the plaintiff to a plan of subdivision and associated documents. When the matter was followed up by the Bank in March 2015, the plaintiff raised objections, and her consent was not forthcoming.
11. In the meantime, the 2013 proceedings continued. An Amended Cross-Summons was filed in July 2014. In June 2015 the Bank made an application to be joined as a cross-defendant to the Cross-Summons. It took the view that it should take steps to protect its interest in Lot 2 which was potentially subject to orders levying costs or other expenses against it. The Bank was accordingly joined as a cross-defendant.
12. At about that time the Court noted that the owners of Lot 2 were going to seek to have the owners corporation make an application for approval of a certain sub-division. The Court also noted that the Bank, without prejudice to its rights to enforce the mortgage, consented to the making of such an application. The Court further noted that, without prejudice to their rights inter se, the parties agreed to use their best endeavours, within the limits of what is reasonable, to have the owners corporation make such an application. The Court subsequently made a number of further notations concerning the endeavours of the parties to achieve registration of an amended plan of sub-division.
13. Eventually, an application was made, and on 1 March 2016 Waverley Council issued a consent to a strata sub-division to reallocate property within the existing lots. The consent was given on conditions including as to the carrying out of certain works concerning fire safety.
14. On 4 March 2016 the Council advised that an application for a building certificate in respect of Lot 2 had been deferred pending certain works (including works concerning fire safety) being performed.
15. On about 1 April 2016 a request was made to the Bank on behalf of the plaintiff that the Bank fund the carrying out of the required works. The Bank was apparently willing to consider taking that course.
16. The plaintiff obtained a report from BCA Logic dated 5 April 2016 which contained the opinion that carrying out the works to comply with the requirements of Council's letter of 4 March 2016 was envisaged to cost something in the range of $25,000 to $75,000. The BCA Logic report was made available to the Bank. In July 2016 BCA Logic wrote to the Bank about the works. In their letter they suggested that certain contractors be engaged, and they offered to become the project managers themselves.
17. In the meantime, the Bank had instructed an agent to provide guidance as to the scope of the works and their cost, to identify suitable contractors, and obtain advice regarding the anticipated change in value to Lot 2 if the works were undertaken and council approval obtained.
18. In July 2016 the Bank's agent obtained a quotation from Frontline Property Maintenance Pty Limited ("Frontline"). Frontline suggested that the works should not cost more than $75,000 (plus GST). This was stated to be only a guide until proper inspections and estimates were carried out. The works were estimated to take four weeks to complete.
19. In September 2016 Frontline revised its estimate of cost, apparently following a site inspection. A view was formed that the floor plans held by the Council did not match the actual layouts. Frontline expressed the opinion that in order to do the job properly, certain things would need to be done (including removal of the gyprock ceilings in Lot 1) and that a "ballpark" estimate of costs was between $50,000 and $130,000. It was stated that accurate costings could be given once ceilings had been removed and a fire inspection carried out.
20. On about 28 September 2016 the Bank's agent obtained a valuation report from Herron Todd White in respect of Lot 2. (I note in passing that the valuer recorded that the plans approved by the Council differed from the actual floor plan). Herron Todd White expressed the opinion that Lot 2 had a market value of $1,325,000 "as is" (within a range of $1.175 million to $1.4 million); and a market value of $1,550,000 "as if complete" (within a range of $1.4 million to $1.625 million). The expression "as if complete" encompassed the making of an assumption that the required works were carried out in accordance with Council requirements.
21. On 14 October 2016 Mr Pike sent an email to the parties to the 2013 proceedings. The email included the following: With the consent of Ms Moallem, Westpac's contractor has obtained access to lot 1, which was necessary to comply with the conditions of the Development Approval and the proposed Building Certificate. Westpac's contractor has reported that the configuration of both lot 1 and lot 2 is different to the configuration shown in the BCA Logic report. As a result of this, the scope of works required to be carried out to satisfy Council's conditions of the DA and the proposed Building Certificate is different to that contemplated by the BCA Logic report. We are instructed that the additional works that would in fact need to be undertaken, which have not previously been contemplated, includes removal of all ceilings in unit 1 and possible additional fire safety works depending on what is found when the ceilings are removed; engagement of an architect to prepare plans of both units both for the purpose of the works and for satisfying council requirements; re-installation of ceilings in unit 1 after the work has been done; submission of the architect plans to council to satisfy its conditions of the DA and the proposed Building Certificate and also for a new Occupation Certificate. Undertaking the additional work will be significantly more expensive and time consuming than the work previously contemplated to satisfy Council's conditions. This expense and delay makes it uncommercial for Westpac to proceed with the necessary work, and Westpac does not intend proceeding with that work. It is Westpac's intention to market and sell the property in its current state.
22. The Court was informed of the Bank's position on 18 October 2016. On 21 October 2016 the Bank gave an undertaking to the Court to the effect that it would accept liability for certain debts of the owners corporation as may be properly levied on Lot 2, even if they are imposed after the completion of a sale of Lot 2.
23. Mr Volpatti of McGrath, Coogee, was appointed as the selling agent. He had earlier been suggested as suitable by the plaintiff. The marketing campaign commenced at the beginning of November 2016. An auction was scheduled for 29 November 2016, but this was subsequently postponed to 5 December 2016.
24. In the course of the campaign, on 16 November 2016, the Council issued a notice of intention to make an order under s 121B of the Environmental Planning and Assessment Act 1979 (NSW) in respect of the fire safety of the premises. On the day of the auction, the Council made such an order under s 121B.

Determination

1. The claim advanced by the plaintiff in the caveat that has recently lapsed may be broadly separated into three parts. These are: 1. that the Bank is selling the property under a confidential agreement with the owner of Lot 1; 2. that there has been improper advertising of Lot 2; and 3. that the sale was entered into in bad faith. The plaintiff further suggests that the sale is at a price up to $1 million lower than it should be.
2. As to (1), there is no cogent evidence of any such agreement, or indeed of any collusion between the Bank and Ms Moallem concerning the sale. I do not regard the matters contained in Ms Marcos' affidavit (at paragraphs 5 to 8, and 9 to 10), even taken at their highest, as providing any basis to conclude that such an agreement exists, or that there is collusion concerning the sale. I note further that there is evidence that on 18 November 2016 Ms Moallem threatened to seek an injunction to prevent the sale of Lot 2 unless certain undertakings were given by the Bank. There is no evidence of any connection between Ms Moallem and the purchaser of Lot 2.
3. As to (2), Mr Wright gave evidence to the effect that until about 25 November 2016 the McGrath website contained a floor plan that did not show the attic space. It is difficult to assess that evidence in the absence of more comprehensive evidence concerning the manner in which the property was advertised for sale. In any case, in circumstances where the attic space is not actually part of the property being sold, I regard the omission to include it on a floor plan as a matter of relatively minor significance, which goes nowhere near establishing that the advertising of the property was "improper", or that there was a willingness on the part of the Bank to receive less than fair market value for the property. I note that the existence of the attic would presumably become readily apparent to anyone who inspected the property, and that the exclusive use by-law concerning the attic space was attached to the draft contracts available to prospective purchasers.
4. The plaintiff also made complaints about the adequacy of the disclosure of various matters to potential purchasers. In particular, she claims that the development approval dated 1 March 2016, the fire safety compliance issues, the BCA Logic report, the Council's notice of intention to issue a fire safety order, and the fire safety order itself, were either not disclosed or only belatedly disclosed.
5. The existence of the development approval (which is in any event a publicly available document) was disclosed in the s 149 certificate attached to the various draft contracts made available to potential purchasers. The development approval raises matters of fire safety.
6. After the Council gave notice of its intention to issue a fire safety order (on 16 November 2016) the Bank's solicitors promptly made amendments to the form of draft contract to include a specific disclosure of the matter (in new Special Condition 53). The notice was itself attached to the draft contract, as was the Council letter of 4 March 2016.
7. After the Council issued its fire safety order on 5 December 2016, the Bank's solicitors acted with speed to make further amendments to the draft contract to disclose the order and have the revised draft available before the commencement of the auction. The order was itself attached to the revised draft. The auctioneer specifically drew attention to the matter at the commencement of the auction.
8. In my view, there was no inadequate disclosure of any of these matters. The conduct of the Bank in this regard seems to be entirely appropriate. It cannot give rise to a suggestion that it was improperly exercising its power of sale.
9. The BCA Logic report was not disclosed to potential purchasers. I can discern nothing improper about that. BCA Logic was not retained by the Bank. Moreover, the Bank had its own information which suggested that the cost of the required works may be considerably higher than the amount indicated by BCA Logic.
10. As to (3), the plaintiff's principal contention as to bad faith seems to be that for a considerable time the Bank proceeded towards achieving registration of an amended strata plan which would include the attic space on the title to Lot 2, but has now changed course and decided to sell the property "as is". The plaintiff contends that the Bank could achieve a much higher sale price if it first proceeded to do the required works and achieve the change in title.
11. However, a mortgagee will only be held to be acting in bad faith in this regard if the proposed course of action is one which is "manifestly safe", and not one involving the taking of risks by the mortgagee for the benefit of the mortgagor (see Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 at 701-2; Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350 at [12]-[13]). That is not the position in this case. The Herron Todd White valuation suggested that the carrying out of the works might bring about an increase in the value of Lot 2 in the order of $225,000. However, the cost estimate for the works given by Frontline was as much as $130,000. Frontline further stated that accurate costings could only be given once the ceilings were removed and a fire inspection carried out. The Bank was entitled to place reliance upon the advice it received. I do not accept the suggestion that Frontline's website showed that it was not qualified to provide an estimate of the cost of the works. There were also other costs to consider, including the costs of arranging accommodation for the occupants of Lot 1 whilst the works were being carried out, and the various costs involved in effecting the change in title. Furthermore, the carrying out of the works would require the co-operation of the occupants of Lot 1. Finally, the undertaking of the works and the change to the title would also bring about further delay, and thus the accrual of yet more interest. The project is clearly one that entails significant risks to the mortgagee.
12. The plaintiff made various other criticisms of the conduct of the Bank in relation to the sale. One such criticism was that the Bank was guilty of delay. The plaintiff submitted that if the Bank wanted to sell the property "as is", it could have done so soon after it took possession in 2013. This overlooks the circumstance that the intervention of the 2013 proceedings brought about a cessation of the selling process, and the commencement of a lengthy period during which efforts were made (including by the plaintiff) towards achieving registration of an amended strata plan. Once that process reached the point of the development approval issued on 1 March 2016, consideration was then given by the Bank as to whether to undertake the works that would be required. There is no inordinate delay here. In any case, a mortgagee is generally entitled to sell at a time of its choosing (see Commonwealth Bank of Australia v Hadfield (supra) at [14]) and the mortgage in this case expressly so provides in cl 27.4.
13. Another criticism is that the Bank's conduct potentially exposes the plaintiff to claims from the purchaser, and to future strata levies. I do not understand these contentions which were not explained in any detail. I consider that they are without substance. The purchaser has not had dealings with the plaintiff. I cannot see how any conduct of the Bank in exercising its power of sale might bring about future strata levies for which the plaintiff may be liable.
14. The plaintiff also submitted that in the face of the selling agent's reports on the "negatives of the property", the Bank, acting reasonably, ought to have immediately taken the property off the market. The agent did record some negatives as part of his regular marketing reports. Ironically, the first negative recorded was concern expressed by buyers about caveats on the title. That is a reference to various caveats the plaintiff herself had lodged. The second negative was a concern expressed about litigation with the owner of Lot 1. Another negative was concern about the attic space and the possibility of having to remove the stairs and seal the roof. The agent also reported a number of positives, including great design and quality finishes, north facing aspect, and great location. A mortgagee is generally entitled to proceed to sell the property in the condition it is in (see Commonwealth Bank of Australia v Hadfield (supra) at [12]). I see no basis to criticise the Bank for proceeding to submit Lot 2 to auction.
15. I note in passing that the marketing campaign (upon which more than $14,000 was apparently spent) appears to have been thorough. Fourteen parties obtained copies of the contract for sale. There is evidence that there were four registered bidders at the auction, two of whom actually bid. There were sixteen bids in total. The bids started at $1.25 million and finished at $1.575 million. The price obtained was $250,000 greater than the "as is" value suggested by Herron Todd White. A reserve price of $1.4 million had been set. That was at the top of the range suggested by Herron Todd White.
16. Finally, a complaint was made that the property was sold at an undervalue. This assertion seems to primarily rest on evidence that the owner of Lot 1 is listing her property (said to be inferior to Lot 2) for sale with a price guide of $2.25 million. That may be so, but the valuation evidence from Herron Todd White, and the experience of the auction itself, lends no support to the view that Lot 2 is actually worth at least $2.25 million. Further, I do not accept that a 2007 valuation of the entire building (undertaken prior to registration of the strata plan), coupled with the statistical and other information proffered by the plaintiff about upward movements in the Sydney property market, suggests that Lot 2 is actually worth more than the $1,575,000 which Yu Bai agreed to pay.
17. In my opinion, having considered the totality of the evidence, and taking the plaintiff's evidence at its highest, the plaintiff has failed to establish a seriously arguable case that the Bank has improperly exercised its power of sale such that the contract it entered into with Yu Bai is voidable. I do not think that a seriously arguable case has been established that the Bank has acted in bad faith or, as put by McLelland CJ in Eq in Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 at 15,583, unconscionably.
18. Even if, contrary to my opinion, a seriously arguable case was established on the evidence, I consider that the balance of convenience is against the imposition of a restraint upon the completion of the sale. A number of factors lead me to that conclusion.
19. First, there is no realistic possibility that the mortgage debt can be repaid. No payments have been made in reduction of the mortgage for nearly four years. There is no evidence about the financial position of Mr Marcos (who is not challenging the Bank's exercise of the power of sale), but the plaintiff is seemingly impecunious. A sale of the property in order to reduce the debt must be regarded as an inevitability.
20. Secondly, the amount owing under the mortgage greatly exceeds the $1,575,000 agreed to be paid by Yu Bai. The Bank claims that the amount outstanding exceeds $2.3 million. The plaintiff does not accept that so much is owing, and indeed asserts that the figure is "plainly wrong". The plaintiff has not, however, adduced evidence to demonstrate the truth of her assertion. It seems that she does not accept that the large amount of enforcement costs should be included in the amount owing. However, even if all enforcement costs are excluded, the debt (including interest since the Bank took possession in July 2013, and an amount of about $165,000 for levies on the property paid by the Bank in 2014) exceeds $1.925 million. On any realistic view, the Bank faces a considerable shortfall.
21. Thirdly, restraining completion of the sale to Yu Bai would expose the Bank to financial risks. There is a significant chance that in those circumstances the shortfall it presently faces will be exacerbated. The risks to the Bank are not ameliorated by any payment into Court, or the offering of an undertaking as to damages that has substance. The plaintiff makes no offer to bring any money into Court, even though there is no dispute that the power of sale has arisen and, on any view, a debt of at least about $1.45 million plus interest since July 2013 is owing.
22. Fourthly, the plaintiff's rights to seek a monetary remedy against the Bank would not be prejudiced if the sale to Yu Bai proceeds to completion.
23. Overall, even making the assumption that there is a seriously arguable case that the Bank has improperly exercised its power of sale, I consider that the risk of injustice to the Bank if the sale is restrained exceeds the risk of injustice to the plaintiff if the sale is not restrained.
24. I have also taken into account, on the balance of convenience, the interest of Yu Bai in being able to proceed to completion of the contract that was entered into some three months ago at the conclusion of the auction.
25. It follows from the above that the plaintiff has failed to establish grounds for the grant of an interlocutory injunction to restrain completion of the contract for sale. In those circumstances, it would not in my view be appropriate for the Court to give leave under s 74O of the Real Property Act to lodge a further caveat claiming that the Bank has improperly exercised its power of sale (see CJ Redman Construction Pty Ltd v Tarnap Pty Ltd (supra) at [24]). The leave sought by the plaintiff will be refused. That includes the leave requested by the plaintiff to lodge a caveat that would remain only for about three weeks. The plaintiff submitted that this would help her to have valuers inspect Lot 2 for the purpose of quantifying her damages. She submitted that the caveat would then be withdrawn and the sale could proceed. Even if leave of that nature could be granted under s 74O (as to which I express no concluded view), I do not think it would be appropriate to give it in circumstances where the interest claimed in the caveat is a right to prevent completion of a voidable sale, not any right to have access to the property.
26. The Summons, which does not contain any claim for final relief, should be dismissed. That dismissal will not prevent the plaintiff from bringing fresh proceedings to seek final relief against the Bank in relation to the mortgage, whether by way of claims for account, damages or otherwise. The Court will further order that the plaintiff pay the Bank's costs of the proceedings.

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: 07 March 2017