Hongkong and Shanghai Banking Corporation Limited v Palmer HC Auckland CP 603-IM00 [2001] NZHC 719 (8 August 2001)

Last Updated: 6 November 2013

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP 603-IM00

BETWEEN THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
Plaintiff

AND GARY PALMER
Defendant

Hearing: 30 July 2001

Counsel: D Brown for Plaintiff
C La Hatte for Defendant

Judgment: 8 August 2001

JUDGMENT OF MASTER ANNE GAMBRILL

Solicitors:
Buddle Findlay, PO Box 1433, Auckland
J C La Hatte, PO Box 4188, Shortland Street, Auckland

[1] I have before me an application for summary judgment. The plaintiff sues on the guarantee given by Mr Palmer for the losses incurred following the mortgagee sale of three properties. The fourth property was subject to a caveat. It was sold by the plaintiff to the occupier, who indeed may have had a cause of action against Mr Palmer or his company, although those comments are speculative, and there is no challenge to any loss thereon.

[2] Mr Palmer guaranteed the debenture and other securities given by the company Chester Caspar & Co Ltd. The copy of the debenture I have is undated but the pleading is it was entered into on or about 27 July 1998 and this is not disputed. The facility was repayable on 31 July 1999. It was not repaid and by 28 January 2000 there was a sum of $47,772.83 outstanding for interest. Subsequently the principal became due. Following sales of the properties between July and August 2000 and having received the proceeds, the sum outstanding including the current account was $318,290.80 for which demand was made on 11 October 2000. No further sum has been paid in reduction. Mr Palmer has been difficult to serve and an application for substituted service had to be made.

[3] The defendant filed a notice of opposition. The grounds are as follows:

(a) The plaintiff failed to meet its duty of care in obtaining the best possible sale price for the properties subject to the mortgage

(b) The plaintiff failed to market the properties for sale

(c) The plaintiff in selling the property to its own customers had a conflict of interest which added to the breach of its duty of care.

Mr Palmer in opposition produced the valuations made in 1997 by the valuers he instructed, but which were made for the purposes of mortgage lending. He relied on these figures and said there would have been no shortfall if the properties had sold for the prices that were recommended for mortgage security. He challenges the fact the Bank sold to Mr Garry Wood and Ashleigh Properties Ltd, a company with which Mr Wood is involved. He produces no evidence to substantiate that challenge. The Bank officers have gone on oath to say that Mr Wood or the company have never been customers and I reject that defence.

[4] I turn to the conduct of the mortgagee sale. The properties were sold by private treaty but it appears that the borrower, with Mr Palmer’s knowledge and participation, had previously entered into contractual arrangements with occupiers of the property to “on sell” under an agreement for sale and purchase. This can and should result in a caveat and is effectively a clog on the interest which is mortgaged, because the lender is faced with an occupier who is a long term purchaser who may or may not be in default in his or her purchase and who has been contributing money towards the deposit by which he or she is then able to finance the total purchase of the property. Whilst the plaintiff’s mortgage takes priority, there is no doubt that there will be practical difficulties if these occupiers have contributed funds and have caveated the title and have a contract with the mortgagor which is enforceable against the mortgagor and possibly Mr Palmer. Both counsel accepted that some arrangements were in place between the company which Mr Palmer guaranteed and the occupiers of the house as it is not an uncommon practice which speculators have been adopting in dealing with property in the South Auckland area.

[5] The second and more important ground of challenge is the sale at the under value by private treaty as alleged by the defendant. The defendant however was forced to rely on the 1997 valuations but says the discrepancy is so substantial there is a need for a hearing in respect thereof. He says there is a lack of marketing, no evidence of the properties being listed with land agents, no evidence of attempting to get the best value and on the face of the record it is important that these matters be tested at a trial. He says there are factual disputes and argues that the Bank has failed to discharge its duty under s 103A of the Property Law Act 1952. There appear to be no arguable issues about the documents, the steps the mortgagee was entitled to take, the taking of those steps including the issue of the demand. What the defendant says is arguable was the manner of sale and the prices those sales produced. There is no dispute that three of the four properties were subject to the rent to buy agreement which included a portion of the deposit in the weekly payments. It is also clear from the reports that by the time of the sale the three flat house at Fairburn Road and the property at Oratu Place, a cross-leased property, both were very run down. The property at 42A Hokonui Road, Otahuhu was valued between $105,000 to $110,000. It was sold to an existing tenant and no issue is taken with that sale. The issues are taken in respect of 1/25 Oratu Place, Manurewa which was valued for sale purposes at $100,000 to $105,000, 42B Hokonui Road. Otahuhu which was valued at $105,000 to $110,000 and 78 Fairburn Road, Otahuhu which was not occupied, which was valued at between $230,000 and $240,000 by the mortgagees valuers Seagar & Partners.

The Fairburn Road valuation

[6] This is the major issue. Originally this property was fully tenanted when the valuation was prepared by Mitchell Hickey & Co. Mr Palmer produces valuation dated 11 February 1998 of Part 78 Fairburn Road, showing a prospective development on a site to be subdivided which never took place. He said, however, it shows how high the land value was and the valuation therein was for a newly developed house. He says that he believes the section was worth $60,000 and that the house was rented at $740 per week. That valuation did not relate to the existing house. We also have the Mitchell Hickey & Co original valuation dated 11 September 1997 where the rents are not actually specified but there is an assessment of potential rental. The property was valued on a replacement approach upon completion of development or an investment approach with capitalisation reaching $445,000. This required work, which I am not aware what was anticipated. The valuation was upgraded on 30 July 1998 but was for a fair market valuation “upon completion to be in the order of $445,000’’. No completion took place.

[7] What I do have now is evidence of a listing of the property at $265,000 on 8 February 2000 from Barfoot & Thompson’s list. The price started at $395,000 reduced to $330,000 and then was listed for $265,000 and this was listed by Mr Palmer for the company.

[8] The Bank faced with the defaults, obtained its own valuation from Seagar & Partners. Seagar & Partners valued at 10 April 2000 on the willing buyer/seller basis and on the effect of a mortgagee in possession under the mortgagee sale conditions. This property was not subject to tenancies or sale arrangements. The valuer said there was deferred maintenance which was necessary. He understood the rentals were $200 per week on each of the three flats, (total $600), a distinct difference from the $750 mentioned previously. He said that the property if offered on the open market its value would be $265,000 to $275,000 (this was the sum listed at Barfoot & Thompson at the time) and on a mortgagee in possession sale at $220,000 to $230,000. Subsequently the Bank enquired of Mitchell Hickey & Co relating to the discrepancy in values and received a valuation from them dated 4 July 2000. The valuer notes that the condition does not appear to be as good as what was assumed to be completed with an upgrading back in 1997 and a drop off in investment properties. The valuer believed that $330,000 was a market value but a mortgagee’s value for mortgagee sale was $265,000.

[9] A similar pattern followed in respect of the other properties. The end result is that the big discrepancy is on Fairburn Road which sold for $250,000 and 1/25 Oratui Place, Manurewa for $100,000 and 42B Hokonui Road, Otahuhu for $115,000.

[10] I set out the analysis of the valuations of the mortgaged properties:

	Seagars valuation	MHK valuation	Actual sale price
1/25 Oratu Place	$100,000-$105,000	$100,000-$105,000	$100,000
42A Hokonui Road	$105,000-$110,000	$98,000	105,000
42B Hokonui Road	$105,000-$110,000	$116,000	$115,000
78 Fairburn Road	$230,000-$240,000	$265,000	$250,000

One can see very little discrepancy between the two current valuations but it appears Mr Palmer’s real complaint is that the yields were not those of the original valuation figures especially on Fairburn Road.

[11] Counsel analysed the provisions of s 103A of the Property Law Act 1952. She said that there was a duty of care concurrent with a duty of good faith. She relied on the following cases: Downsview Nominees Limited v First City Corporation Limited [1993] 1 NZLR 513, Apple Fields v Damesh Holdings Limited (Court of Appeal, 8 March 2001, CA 149/00) page 17 and the original English cases Cuckmere Brick Co Limited v Mutual Finance Limited [1971] 2 All ER 633 which was applied in new Zealand in Alexandre v NZ Breweries Limited [1974] 1 NZLR 497. Justice Tompkins summed the matter up aptly in Schollum v Graham (20 November 1996, CP90/94, Auckland HC) where he said:

“Was the defendant in breach of his duty to take reasonable care to obtain the proper price bearing in mind the defendant’s right to realise his security by selling (the mortgage property) at the time and in the manner he considered appropriate”.

[12] Counsel pointed out that the mortgagee’s duty arose at the time of sale to take reasonable care to obtain the best price reasonably obtainable at the time of sale. Countrywide Banking Corporation v Robinson [1991] 1 NZLR 75 where as in this case there has been a change in the values of the property. Counsel analysed the authorities relied on by Mr Palmer’s counsel but I am satisfied that they do not assist his case at this point in time. The Court’s job is to approach the question on the basis as to whether the mortgagee has fulfilled its duty of care. The Court must look at the circumstances, the history, the time of the sale, the valuations produced to it and the purpose of the sale ie to obtain repayment. The mortgagee has no obligation to postpone the sale and the mortgagee has a right to sell to an interested party. There has been complaint here of the mortgagee selling to Mr Wood but I have already rejected that complaint. Mr Palmer complains that the prices were too low. He does not take into account the deteriorating state of this property nor does he tell the Court of the rentals being paid at the time of sale nor does he advise of the purchase payment arrangements.

[13] I am satisfied that there is insufficient evidence in respect of those issues before the Court produced by the defendant to found a defence.

The marketing of the property

[14] He complains that the Bank sold to existing customers. This is not correct and I accept the Bank’s deposition. The Bank is entitled to sell privately. The Bank faced certain problems, if they were problems, created by the principal debtor, which the guarantor was the director. The Bank’s ability to sell is no doubt constrained by the occupancy of people with little money paying sums off to the debtor herein which included deposit as well as rental. The Bank says also that there was a benefit in selling privately because they say they reached the valuation limit. There was no deduction for any charges or land agent’s commission which could have made a substantive difference to the sums received. Whilst Mr Wood originally approached the Bank and indicated he was interested in the purchase of these properties, it is accepted the Bank actually approached Mr Wood, but they were aware that he was a willing buyer and he was prepared to buy with the tenants in occupation without the Bank having to exercise its rights as mortgagees. This would have required a substantive summary judgment application in this Court to obtain a judgment for a declaration to obtain possession of the property and the occupiers would have lost the benefit of a deposit they may have paid. Whether this limitation by the borrower in selling was permitted in terms of the security was not an issue in this hearing. The Bank is entitled to make a conscious decision to sell by private treaty without a land agent.

[15] The submission made by counsel was it was clear that in addition to satisfy any duty of care it might have under s 103A of the Property Law Act, the Bank fulfilled its obligation of good faith owing to the company and Mr Palmer. There was no sacrifice of interest and it exercised its power of sale purely for the obtaining of payment. There was no fraud and no conflict of evidence. In my view, although this matter was argued on a factual basis, the facts raised in opposition were not credible and did not support the contentions advanced by the defendant. The 1997 and 1998 valuations produced bear little relevance to the current valuations. The properties had obviously degenerated. The valuations related to prospective developments of the land in one case, 78 Fairburn Road. The rentals were no longer the rentals being received. That property was not upgraded and I think it is significant that although Mitchell Hickey & Co were requested by the Bank to explain their valuations and produced a new valuation, they are still valuers who have a professional standard to meet. In my view it is significant that both valuers reached very similar sums as to their assessment of the properties after their ownership for two to three years by the mortgagor. I believe that the sales were conducted in accordance with the rights of the mortgagee. They were in accordance with the valuations that were current at the time of the sale. They took into account the fact that there was no land agent’s commission which can be regarded as a benefit in most cases. The guarantor and the company had been unable to develop that Fairburn property as initially contemplated in terms of the valuations originally obtained and on which the substantial loss occurred. That property was marketed unsuccessfully by Barfoot & Thompson for some months. I am therefore satisfied there can be no real criticism of the Bank’s conduct that would entitle the Court to refuse summary judgment.

[16] There is therefore summary judgment for the plaintiff in terms of the statement of claim. A memorandum can be filed and served. Costs are to be at scale 2B including a half day hearing time.