LEONARD DONALD WATSON HARRIS v PATRICIA ELLEN HARRIS & ORS [2002] NZCA 126 (10 June 2002)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca165/01

	between	leonard donald watson harris
		First Appellant

	AND	patricia ellen harris
		Second Appellant

	and	bruce leonard douglas harris
		Third Appellant

	AND	ANZ BANKING GROUP (NZ) LIMITED
		Respondent

Hearing:	22 May 2002
Coram:	Keith J Fisher J Salmon J
Appearances:	J E Hodder and E S K Dalzell for the Appellants G Langham and D A Webb for the Respondent
Judgment:	10 June 2002

judgment of the court delivered by KEITH J

[1] The respondent bank obtained summary judgment against the appellants (the mortgagors) for the payment of expenses the bank incurred in relation to the exercise of its powers of sale under a mortgage it held over the mortgagors' farm.The mortgagors contend that the judgment was wrongly entered in respect of three of the sums

(1) a valuation fee $2,700.00

(2) a real estate agent's commission $59,715.09

(3) legal costs and disbursements $16,900.54

They accordingly appeal to this Court against the judgment of Master Venning, given in the High Court in Invercargill on 3 April 2001 (CP12/00).

[2] Two of the other sums paid by the bank - to a farm consultancy for DDT testing and to the local authority for rates - were not and are not in issue.

The facts in brief

[3] The bank gave notice of default under the mortgage in November and December 1999.It took steps to exercise its powers of sale under the mortgage, obtaining the valuation report in March 2000, agreeing with a real estate agent to an exclusive agency agreement also in March, instructing solicitors and scheduling a mortgagee sale auction for 27 April 2000.The mortgagors in fact arranged the sale of the property, they paid their own agent $57,121.87 in connection with it, and the bank accordingly cancelled its mortgagee sale.

[4] The bank contends that the three expenses are recoverable in full under the mortgage and in terms of s81 of the Property Law Act 1952.The mortgagors contend that because the real estate commission was unreasonably incurred and the valuation and legal fees were unreasonable in amount the expenses are not recoverable against them or their property.

[5] Under the mortgage agreement the mortgagors were in default for failing to make payments to the bank and to the local authority for rates.As a result the bank had powers of enforcement including the power to sell the land. Clause 12 of the agreement, headed Enforcement, contained these provisions:

12.1 Proceeds:Moneys received by us [the bank] ... as a result of the enforcement of this mortgage are to be used towards paying off:

(a) first, the costs and expenses incurred by ourselves ... in exercising or attempting to exercise any of the powers given to us ... under this mortgage, (including all legal costs on a solicitor and own client basis);

(b) secondly, any other outgoings paid in connection with the exercise of those powers or as a result of those powers being exercised;

... .

[6] The interpretation provision included these definitions:

1.2 Interpretation of Words:In this mortgage, where we refer to:

...

"expenses", in relation to the term "indebtedness", that reference includes:

(i)all costs, taxes, stamp and similar duties and taxes, commissions, charges and expenses (including legal fees on a solicitor and own client basis) incurred or sustained by us ... in connection with that indebtedness; and

(ii) all the costs and expenses referred to in clause 18.1 that are or become payable by you [the mortgagors];

...

"indebtedness", that reference includes an obligation (whether present or future, actual or contingent, joint or several or as principal or surety) relating to the payment of money and includes all expenses; ... .

The definition of "indebtedness" was to be related to that of "moneys owing":

"moneys owing" means all or any of your indebtedness to us for the time being together with any indebtedness we incur on your behalf from time to time ... .

[7] Clause 13, Indemnities, read:

13.1 Default:You indemnify us ... on demand of all losses and liabilities arising from, and every cost or expense (including all legal expenses on a solicitor and own client basis) incurred in connection with:

(a) your being in default under this mortgage;

(b) anything done or not done (whether or not negligently) in the exercise or attempted exercise of the powers given to us and to any receiver by the terms of this mortgage;

...

13.2 Liability in Relation to the Land:You acknowledge and agree that we do not incur any liability or undertake any of your obligations in respect of the land merely because we have taken security over the land.However if you fail to pay off a liability affecting the land, or if you do not do something you are obliged to do in relation to the land (whether or not required in terms of this mortgage), we may step in and make that payment for you, or perform that obligation on your behalf.If we do so, you must indemnify us on demand for all liabilities and losses and for each cost and expense we incur as a result . ...

[8] Clause 18, Fees and Expenses, also required repayments by the mortgagors:

18.1 Costs We Incur:You must pay on demand, all costs and expenses which are incurred by us ... in connection with:

...

(c) the exercise of any power given to us ... under this mortgage;

(d) the protection or enforcement of, or the attempted protection or enforcement of, this mortgage ...

in all cases on a full indemnity basis. Such costs and expenses include but are not limited to taxes, stamp and other duties, registration, inspection and valuers' fees and legal fees (on a solicitor and own client basis).

The Master's judgment

[9] The Master began with the proposition that the onus remained with the plaintiff (the bank) throughout to satisfy the court that the defendant had no arguable defence;can the plaintiff satisfy it there is an absence of any real issue to be tried?Pemberton v Chappell [1987] 1 NZLR 1.It is convenient to recall here, as Mr Hodder reminded us, that for Somers J in that case satisfaction indicates that the Court is confident, sure, convinced, is persuaded to the point of belief, is left without any real doubt or uncertainty (at 4).

[10] The defendants, he said, relied on s18 of the Property Law Act, and in particular on subs (1) and (4):

(1) A mortgagor is entitled to redeem the mortgaged land at any time before the same has been actually sold by the mortgagee under his power of sale, on payment of all money due and owing under the mortgage at the time of payment.

...

(4) For the purposes of this section the expression "money due and owing under a mortgage" includes all expenses reasonably incurred by the mortgagee--

(a) For the protection and preservation of the mortgaged land, or otherwise in accordance with the provisions of the mortgage; and

(b) With a view to the realisation of his security,--

and in either case includes interest on the sums so expended at the rate expressed in the mortgage deed.

[11] The valuation fee was attacked by the defendants as being unreasonable in amount.They compared the fee of $1,433.81 they had paid for their own valuation of the farm done at about the same time.The Master had three answers.First, it was the action of the mortgagee in incurring the expense that must be unreasonable. He qualified that by allowing there may be need for consideration of the quantum, but, and this was his second point, there was no evidence to suggest that the fee charged was anything other than reasonable. Thirdly, the bank was entitled to rely on the covenants in the mortgage to recover the fee - a matter he developed in relation to the real estate agent's commission.

[12] That commission was challenged by the defendants on the basis that because the bank had not exercised its power of sale its agent was not entitled to any commission at all.The Master held (1) that both cls 13(1)(a) and (b) and 18(1)(c) of the mortgage (paras [7] and [8] above) applied, (2) that for the purposes of exercising or attempting to exercise the power of sale the bank appointed a real estate agent and in so doing incurred an obligation to the agent to pay the fee, and (3) that the bank was able under the mortgage to require the defendants to pay that cost or expense.The bank could rely on the terms of the personal covenant.He rejected the defendants' attempt to invoke s81 which was to be regarded as extending rather than reducing the mortgagee's rights.

[13] Finally, on the legal fees claimed the Master ruled that the bank again could rely on the provisions of the mortgage.He referred in particular to cl 18.Even were there a requirement of reasonableness there was no suggestion or evidence before the Court that the fees incurred were unreasonable.

Submissions

[14] Mr Hodder, for the mortgagors, based the appeal on the legal principle, carried forward, he said, in statute, that a mortgagee is not entitled to recover from a mortgagor costs or expenses unreasonably incurred or unreasonable in amount.The principle and the statutory provisions inform the interpretation of the terms of mortgages and the particular indemnity provisions in issue in this case ought to be interpreted consistently with them.If they could not be so interpreted they ought to be held unenforceable as a matter of public policy on the basis that the expenses were unreasonably incurred or unreasonable in amount.The mortgagors had real defences against the bank's claims and the Master erred in granting summary judgment in favour of the bank.

[15] Mr Webb, for the bank, contended that the Master did not err.In particular, cases and principle required a robust view to be taken of what amounts to reasonable conduct by a mortgagor in realising its security, s81 allowed recovery of the expenses claimed even if they were unreasonable in amount, there was no real evidence they were unreasonable in amount, and the expenses were payable under the contract in any event.

The law

[16] It has long been settled that a mortgagee when exercising its power of sale is bound to behave as if selling its own property, so that the mortgagor may receive credit for the fair value of the property sold;that is to say, the mortgagee must obtain a proper market price (eg McHugh v Union Bank of Canada [1913] AC 299, 311 (PC) and Palk v Mortgage Services Funding Plc [1993] Ch 330, 338 (CA)).Parliament put the proposition, in part at least, in statutory form in 1993 in s103A of the Property Law Act:

A mortgagee who exercises a power of sale of land or other mortgaged property, including exercise of a power of sale through the Registrar of the High Court under section 99 of this Act, owes a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable as at the time of sale.

(This was enacted as part of the company law package;see also the Receiverships Act 1993 s19, building on the earlier s345B of the Companies Act 1955 enacted in 1980, and Law Commission, Company Law : Reforms and Restatement (June 1989 NZLC R9) paras 772-773 and draft section 104 AK pp 399-400).

[17] Mr Hodder also took us to the mortgagee's related entitlement under s104 of the Land Transfer Act 1952 to "just allowances" relating to the sale, referring to such cases as Stanley v Murphy [1922] NZLR 838 (CA) and Hinde, McMorland and Sim Land Law (1979) vol 2, para 8.136.

[18] The objective of the "best price reasonably attainable", as the Privy Council pointed out in McHugh,

recognizes as a necessary corollary the right of the mortgagee to treat the reasonable expenses of [the sale] as a deduction from the amount realized, and indeed, unless this is done, the sale price does not truly represent the value of the property sold, because it is a sum which the owner could not have obtained for it without paying the necessary costs of realization.([1913] AC at 312)

[19] Parliament has recognised that corollary (at least in part) in s81 of the Property Law Act quoted in para [10] above.Both the legislation and the authorities proceed on the footing that the right of deduction or recovery of reasonable expenses is not dependent on, and may extend beyond, whatever contractual rights to repayment the mortgage agreement might confer (Sharp v Amen [1967] NZLR 629, 632-33).

[20] But can the contractual provisions stand alone, unaffected by any test of unreasonableness arising from equity or the statute, as the Master at times appears to suggest and Mr Webb was inclined to argue?We do not think so.The duties in equity and under s103A to take care to obtain the best price reasonably available are owed to the mortgagor among others. They provide the context in which the mortgagee's powers and rights to recover or deduct reasonable expenses of the exercise of the power of sale are to be seen.The duties are not limited to the duty to exercise the power in good faith for the purpose of obtaining repayment and not for other purposes.While the Privy Council, on appeal from New Zealand, in Downsview Nominees v First City Corporation [1993] 1 NZLR 513, 522, did state that duty it also recognised the duty to "take reasonable care to obtain a proper price" (524). That duty was soon put into more comprehensively stated statutory form in s103A.Sir Richard Scott, the Vice-Chancellor, writing for the English Court of Appeal in a recent comprehensive judgment about the duties of receivers owed to the owners/mortgagors in the conduct of that business, has similarly emphasised that the duties go beyond the duty of good faith : Medforth v Blake [2000] Ch 86.A few years earlier he had given a judgment to similar effect in respect of the deduction of costs arising from the exercise by a mortgagee of its power of sale in Gomba Holdings Ltd v Minories Finance [1993] Ch 171 (CA), a case on which Mr Hodder relied.

[21] The mortgage provisions are then to be seen in their wide statutory and equitable context.They are to be read as allowing deductions or requiring repayments by the mortgagors of expenses so long as the expenses are reasonably incurred.We do not reach the question whether the provisions could be considered as unenforceable for reasons of public policy for inconsistency with the unreasonableness limit, since the express language which would be required to raise that question is not used in the relevant clauses set out in paras [5]-[8] above;see Scott LJ in Gomba at 187.

[22] In terms of the law to be applied, one question remains.Is the Court limited to the question whether the expense was unreasonably incurred or can it also consider whether the expense was unreasonable in amount?In fact the distinction between the two disappears once it is recognised that it would be unreasonable for a mortgagee to commit itself contractually to pay for services on a basis which would allow the provider to charge an unreasonable amount. The Master at times suggested a narrower approach.We consider that the wider approach is the correct one as Mr Webb was inclined to concede.One example helps make the point. While the incurring of advertising expenditure promoting the sale is obviously proper and reasonable, world wide advertising at vast expense would not be.To again refer to Scott LJ in Gomba, the expense must not be unreasonable in amount.The terms of s81(4) must also be read in that sense.

[23] It follows that the Court does have power to examine whether the amounts spent on valuation or legal fees were reasonable as well as whether it was reasonable to incur at all the extra expense that might arise from a sole real estate agency in the event of a sale by someone else.We accordingly turn to those three matters.

The valuation fee

[24] The evidence bearing on the reasonableness of the valuation fee consists of the invoices paid by the mortgagors and the bank, the former being about half of the latter, and Mr Harris' evidence that the bank's fee appears to be grossly overcharged.As was pointed out from the bench and accepted by Mr Hodder, Mr Harris' evidence is no more than a submission and we are left with the invoices.They may indicate - the Master thought they did - that the valuations were prepared for different purposes, with the bank's being for the purpose of a forced sale;the bank's also included research not in the NZIV database.We see no reason for disagreeing with the Master's conclusion that the bank's fee was reasonable.

[25] Accordingly this part of the appeal fails.

The real estate agent's commission

[26] The appellant challenged the inclusion of the commission expense on two grounds - that a sale by the owner/mortgagor did not come within the exclusive agency contract signed by the bank and the agent, and that entering into an exclusive agency agreement was unreasonable.

[27] The interpretation issue arises from this provision:

Sole Agency and Exclusive Marketing

... this agency agreement shall constitute a sole and irrevocable agency up to and including midnight on the 31 day of July 2000 on the terms set out in this paragraph together with the terms of the general agency, and if while this sole agency shall be in force the property is sold by you, any other person or myself, on the above mentioned price or on any other such price and upon any such terms and conditions as are acceptable to me or if at a later date, a sale eventuates to a purchaser introduced to the property during the period of this exclusive agency, I agree to pay your fees herein referred to.(emphasis added)

[28] The "Appointment of Agency" is by the mortgagee bank of the land agent in respect of the mortgagee sale of the Harris' property and is signed by an agent of the mortgagee.

[29] The critical issue is whether the words "any other person" in the agency agreement include the mortgagors so that if they sold - as they did - the real estate agents were entitled to their fee from the bank.The Master so held, referring to the literal wording (it was "clear enough"), the purpose of a sole agency agreement (the sole agent is entitled to a fee whoever sells), and the surrounding circumstances (essentially the same point).

[30] Mr Hodder submitted that the words "any other person" should be taken to mean "any other person in the exercise of the bank's power of sale".The bank and the agent could effect a sale only by reference to the mortgagee's power of sale.He called in aid the judgment of Denning LJ in John Meacock & Co v Abrahams Loesher, Third Party [1956] 1 WLR 1463 (CA).In that case auctioneers sued the second mortgagee to recover the commission in a sale before auction, the sale having, as here, been effected by the mortgagor.The scale of charges of the Chartered Auctioneer's and Estate Agents' Institute contained this provision:

Sale before auction.If a sale of the property, whether arranged by the auctioneer or not, is effected between the date of acceptance of instructions and the date of the auction, commission is payable to the auctioneer on the same scale as for a sale by auction.

[31] Denning and Hodson LJJ, with Morris LJ dissenting, held that the claim was limited to a sale by the client itself (as well of course as the auctioneer). The auctioneers' claim therefore failed.According to Denning LJ:

The object of this clause is quite plain. It is to cover the case where a client instructs auctioneers to sell a property for him by auction, and then, before the auction actually takes place, the client sells the property himself. In such a case the client must still pay full commission to the auctioneer, for the very good reason that the auctioneers' work in putting up the property, advertising it, and so on, may well have been one of the causes why the client was able to sell the house himself. The clause clearly covers a sale by the client before the auction: and I think it would also cover a sale with his concurrence.But the auctioneers seek here to extend it to a sale by a third person. It covers, they say, a sale by the mortgagor without the consent of the second mortgagee.

I must say that I think the people who framed this clause had not in mind at all the case of mortgagee and mortgagor; they had in mind the simple case of a client selling the property himself. It seems to me to be an unnatural construction of this clause to say that it also applies if someone else-someone other than the client-sells the property.

Suppose, for instance, the first mortgagees, the Abbey National, had sold the property before the auction. They had ample power to do so, and I can imagine several circumstances in which they might have thought it desirable to do so. Would the auctioneers in that event be entitled to claim full commission from the second mortgagee? Clearly not. So also if the mortgagor sells.

Mr Stocker asked us to give a wide construction to this clause; but I do not think that we should do so.It must be remembered that it is a clause put in by the auctioneers for their own benefit, in which they stipulate that, although they have not done all the work that was contemplated, nevertheless they are to have full commission.For instance, in this case they have not had to hold an auction at all.I can visualize cases where they may have done nothing beyond accepting instructions.Suppose a client gives them instructions one day and sells himself the next, before they have done anything. Nevertheless, they stipulate for full commission irrespective of the amount of work they have done. Such a stipulation should, I think, be given its natural meaning and should not be extended so as to be given a wide unnatural meaning.(1466-67)

[32] One answer to that argument is partly provided in the passage quoted. The auctioneer will have undertaken certain steps which may well have facilitated the sale by other persons and have facilitated it equally - whoever the seller may be: the mortgagor, another mortgagee or the client (the mortgagee exercising the power of sale).

[33] Morris LJ emphasised that purpose and the broad terms of the agreement:

It seems to me ... that the purpose of the clause was to ensure that the auctioneer should not be deprived of payment for his work, once he has accepted instructions from someone in a position to give those instructions, and the work done in preparing for an auction is rather different from the work that might be done in a case where there is merely an invitation to agents to find a purchaser. If the property is sold before auction, it is but reasonable and fair that the auctioneer should be paid, and the language, as it seems to me, is wide enough to refer to a sale by anyone entitled to sell the freehold. I see no reason to read in any words of limitation, and I see no reason to give the wide words a restricted meaning, when by doing so the apparent purpose of the words and of this clause as it affects the auctioneer would be defeated. (1476)

He had earlier said this:

It seems to me that in the ordinary case the only person who could sell would be the person who had first given instructions for the sale to take place; but if that person is a mortgagee, then the situation might arise as in the present case. The possibility that the mortgagor may sell is one known to the mortgagee when he enters into his contract with the auctioneers. If he had wanted to have a modification of the language of the contract, he could have asked for it. It is the selling of property before auction that normally prevents an auction taking place, but whether before the auction the property is sold by the mortgagee or sold by the mortgagor, the effect is the same so far as the auctioneers are concerned. (1474-75)

[34] We of course have to give meaning to the terms of the agreement before us. What do its terms, given the purpose and likely effect of an exclusive agency, require?The terms are plain, they are broad (it is hard to think of broader wording) and the purpose of the exclusive agency of recompensing the agent for its work whoever sells is met by the current sale being brought within them. We accordingly agree with the Master that the sale by the mortgagors does come within the provision and the fee was paid by the bank in accordance with its obligations.

[35] The second question under this head is whether the bank's action in incurring the expenses of exclusive agency was reasonable.It led to the prospect, realised in the event, of the mortgagors having to pay two commissions.It was of course reasonable for the bank to instruct an agent. As already indicated, an exclusive agency also gives the agent an added incentive to take proper steps to see that a sale occurs.

[36] Mr Hodder argues that the evidence clearly provides a basis for the mortgagors' proposition that it was unreasonable for the bank to create a situation where two commissions would be payable if they sold the property. The bank, according to Mr Harris whose evidence was not challenged, knew at the time of the sole agency appointment that the mortgagors were attempting to sell the property. Mr Harris also deposed that the bank encouraged them on that course.

[37] The only specific evidence in support of the encouragement contention was based on a letter from the bank to the mortgagors' accountant.That letter was written more than a month before the bank appointed the sole agent and warned the mortgagors that at the end of that period the bank would be taking action. Even if it can be read as an encouragement (which may be doubted), that in itself is not to stand in the way of the bank taking reasonable steps to sell the property.

[38] The expense of the sole agency, on the evidence, was reasonably incurred. We are not satisfied that the mortgagors had any arguable defence.

The legal fees

[39] The initial claim for legal fees was for $22,422.95.That figure was reduced in the hearing before the Master by $5,422.41, with the bank abandoning certain claims.A further $100 was deducted in respect of the incorrect serving of Property Law Act notices.

[40] The Master concluded that the other invoices all related to the sale process and fell within cl 18 of the mortgage agreement (para [8] above).They were properly recoverable.

[41] Mr Harris in his affidavit challenged two aspects of the original claim. They related to the invalid service and legal costs in respect of claims for the recovery of proceeds of a sale of crop dating back to 1998 (notices of default on the mortgage were given in November and December 1999).Those matters were dealt with by the Master.

[42] Mr Hodder contended that in those attempts to resolve precisely what was reasonably owing the Master erred.Those were matters for trial or more sensibly cost revision.The mortgagors before the Master had provided the Master with an evidential footing for the defence.

[43] We disagree.This was not a case of the Master picking away at a single sum.He - and the bank - had particular reasons for making the deductions he did.The remaining payments, on the evidence before him, were reasonable expenses of the sale.The mortgagors had no arguable defence to the remaining figure.This challenge to the Master's decision also fails.

Result

[44] The appeal is dismissed.The respondent is entitled to costs of $3,500 and reasonable disbursements including travel and accommodation for one counsel, to be fixed by the Registrar if the parties cannot agree.

Solicitors

Chapman Tripp Sheffield Young, Wellington for the Appellants

Lane Neave Ronaldson, Christchurch for the Respondent