KERR v SIMPSON DOWSETT MACKIE LAWYERS NOMINEE COMPANY LIMITED [2020] NZHC 2524

KERR v SIMPSON DOWSETT MACKIE LAWYERS NOMINEE COMPANY LIMITED [2020] NZHC 2524[9 September 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-343[2020] NZHC 2524BETWEEN ELIZABETH ANNE KERRPlaintiffAND SIMPSON DOWSETT MACKIELAWYERS NOMINEE COMPANYLIMITEDFirst DefendantPERFORMANCE TRUSTEES LIMITEDSecond DefendantHearing: 9 September 2020Appearances: Neil King for the PlaintiffGrant Collecutt for the DefendantsJudgment: 9 September 2020ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELLSolicitors:Sinisi Law, Otahuhu, Auckland, for the PlaintiffSimpson Dowsett Mackie, Auckland, for the DefendantsCopy for:Neil King, Barrister, Auckland, for the PlaintiffGrant Collecutt, Barrister, Auckland, for the Defendants[1] Ms Kerr, as mortgagor, sues the defendant mortgagees under s 176 of theProperty Law Act 2007 over the sale as mortgagees of properties at 130 and172 Parker Road, Oratia, Auckland. The defendants have applied for security forcosts under r 5.45 of the High Court Rules 2016.[2] The defendants say that there is reason to believe that Ms Kerr will beunable to pay their costs if she loses and accordingly seek security. In applicationsunder r 5.45 of the High Court Rules 2016, the court generally follows these steps:[a] Has the applicant satisfied the court of the threshold underr 5.45(1)?[b] Should the court exercise its discretion under r 5.45(2)?[c] What amount should security be fixed at?[d] Should a stay be ordered?Ms Kerr's claim[3] Ms Kerr owned two properties at Parker Road, Oratia, no.130 described asLot 3 DP367142 with an area of 7.739ha, and no.172, being Lot 1, DP53201 andLot 1 DP61532 with 6.2810 ha. In October 2010, she granted a first mortgage overthe properties to the first and second defendants as tenants-in-common. SimpsonDowsett Mackie Lawyers Nominee Company Ltd had a 325/600th interest andPerformance Trustees Ltd had a 275/600th interest. The mortgage secured a loanfor $600,000 which was repayable on 8 April 2012. The mortgage was not repaidon the due date. Penalty interest was charged at 18.95 per cent per annum on theunpaid balance. In October 2012, she also mortgaged the property to CityWideCapital Ltd for $7,700 for costs charged for due diligence by a new proposedmortgagor. The defendants sold the properties by auction on 1 March 2013 for$880,000. Title was transferred on the 28 March 2013. She pleads that afterdeducting costs and interest, there was a shortfall of $3,715.79. Marketing costscharged for the sale of the property were $2,839.39, but marketing was limited toa sign on the road and an advertisement in the local newspaper. On 11 February2013, the properties were worth $1,265,000, assessed on the basis of a proposedsubdivision. In August 2011, the properties had rating values of $1,650,000. Thepurchaser of 130 Parker Road re-sold the property in 2015 for $2.85 million withno improvements except a driveway.[4] Under s 176 of the Property Law Act 2007, a mortgagee who exercises apower of sale to sell a mortgaged property owes a duty of reasonable care to themortgagor to obtain the best price reasonably obtainable as at the time of sale.Ms Kerr says that the defendants breached that duty because:[a] there was not marketing over a reasonably long period of time;[b] there was not an extensive advertising and promotional campaign;[c] the sale price cannot be reconciled with expert opinion as to value;[d] the sale price was much less than the assessed value and[e] there was no explanation for the discrepancy.[5] Ms Kerr claims damages of $385,000, being the difference between the bestprice readily obtainable and the price the properties were sold for.Is there reason to believe that Ms Kerr will be unable to pay the defendantscosts if the plaintiff is unsuccessful?[6] The defendants rely on circumstantial evidence. They estimate that thecosts that Ms Kerr might be ordered to pay if the case goes to an all-defendedhearing and she is unsuccessful will be in the order of $70,000. That includes anestimate of $15,000-$20,000 in fees for an expert witness. Ms Kerr, the defendantssay, is 82 years old. They have got that date off a copy of her driver's licenceshowing that she was born on 2 August 1937 (actually making her 83 now).She was 75 when the properties in Park Road were sold. The defendants sold theproperties because she did not make any payments under the mortgage. After theproperties were sold, she did not receive any of the proceeds. As she could notmeet the mortgage commitments and her only income is likely to be her nationalsuperannuation, it can be inferred that she does not have the means to pay asubstantial order for costs.[7] Ms Kerr has not given any evidence as to her financial position. It issubmitted for her that no inference should be drawn from her failure to provideevidence as to her means.1 Reference was made to cases where impecuniosity hadbeen inferred from the existence of a contingency fee arrangement, where theplaintiff had agreed to give other defendants security and where the plaintiff hadbeen found impecunious in earlier proceedings. It was submitted that none of thesesituations arose here.[8] In the absence of any evidence from Ms Kerr to the contrary, I infer fromthe defendants' evidence that after the sale of the Parker Road properties in 2013,Ms Kerr's only likely income has been her national superannuation, which is likelyto be only enough to meet her day-to-day living costs. She is unlikely to haveaccumulated funds to meet a substantial order for costs. Accordingly, any orderfor costs made against her if she loses the case is likely to be barren. Thedefendants have established the threshold.Exercise of the discretion[9] The court balances competing interests – the defendants' interest in beingprotected from a barren costs order, and the plaintiff's right of access to the court.To do that, the court makes an assessment of the strength of the plaintiff's case.Necessarily, that is a matter of impression. For this case, the parties have indicatedgenerally what the case is about and, quite properly, have not provided full detailedbriefs of evidence.1 Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430 (HC).[10] As to claims under s 176 of the Property Law Act 2007, case law establishesthe following propositions:21 Section 176 of the Property Law Act 2007 codifies the duty which,under the general law, a mortgagee exercising a power of sale will betaken to owe to the persons named in the section, includingguarantors.2 The duty of care is concerned with obtaining the best price reasonablyobtainable as at the time of sale. It is a duty to take reasonable care.It does not necessarily follow that the best price reasonably obtainablewill be achieved.3 The duty has to be measured at the time of sale. The duty arises at thetime that the decision to sell is made. There is a need to analyse thesteps taken once the decision to sell is made, up to the time of sale.4 The duty of care does not qualify the mortgagee's right to decide ifand when to sell.5 When deciding whether reasonable steps have been taken by themortgagee to obtain the best price, the steps taken by the mortgageeand those acting for it must be looked at in the round. The issue is acommercial one to be viewed in practical commercial terms.6 Where the security is substantial, or specialised property is involved,it will usually be necessary for the mortgagee to obtain and act uponspecialised advice as to the method of sale. Appointing a competentagent to sell does not discharge the mortgagee's duties, but since itsduty is ultimately only one of reasonable care, putting the matter inthe hands of a competent agent will usually go a long way towardsdischarging the mortgagee's duties.7 In the normal course, the proposed sale will need to be advertised withadequate description of the property's attributes and within reasonwhile wanting to attract all possible purchasers. In some cases thiswill need to extend to both general and specialist publications.8 There is no obligation to postpone the sale in the hope of obtaining abetter price later. Nor is there an obligation to break up the assets tosell in a piecemeal manner, if this can only be carried out over asubstantial period or at a risk of loss.9 When assets are sold by tender or auction, a reasonable period mustusually be allowed for purchasers to inspect the property and arrangefinance before submitting bids.10 For a breach of duty to be actionable, there must be proof of damage.11 A mortgagee is under no obligation to improve the property orincrease its value.2 Southland Building Society v Austin [2012] NZHC 497 at [29].12 A mortgagee's sale for a price less than the current market valueassessed by valuers does not of itself establish a breach of dutyalthough a large discrepancy may indicate a failure to take reasonablecare.13 A mortgagee does not have any general duty to maintain a propertyprior to sale.14 Following the service of the Property Law Act notice, there is no dutyon a mortgagee to keep a guarantor informed of sales activities.15 The mortgagee is not entitled to sell in a hasty way, at a knock-downprice sufficient to pay the debt which, because of the speed of sale,leaves a lower price than could otherwise be obtained.[11] It has been said that the following steps indicate that a mortgagee has madereasonable efforts to obtain the best reasonably obtainable price:3[a] The appointment of a reputable estate agent to market the property.[b] Obtaining a valuation report from an experienced valuer as a guide towhat could reasonably be expected for the property.[c] Marketing over a reasonably long period of time.[d] An extensive advertising and promotional campaign.[e] A properly conducted auction.[f] A sale price that, given all the circumstances, can be reconciled withexpert opinion as to value.[12] Evidence proving these steps goes towards showing compliance with theduty under s 176. However, a warning must be given. While mortgagees such asbanks, building societies, finance companies and solicitors' nominee companiesmay follow these steps as a matter of routine, it is still necessary to check whetherthese steps are appropriate in the particular circumstances of the case.3 Southland Building Society v Austin [2012] NZHC 497 at [30].[13] The Parker Road properties were sold by auction on 1 March 2013 for$880,000. The sale was by auction conducted by a licensed real estate agent. Theagreement uses the "Particulars and Conditions of Sale of Real Estate by Auction"of the Real Estate Institute of New Zealand and the Auckland District Law Society,4th edition, 2012. Some of the standard terms have been struck out. Further termshave been added. Importantly, the property was sold "as is where is". Settlementof the sale was on 28 March 2013.[14] The defendants have provided a copy of a report by a registered valuerdated 17 July 2012 for both properties. The valuation was provided for mortgagepurposes. The valuation records that the properties had been given ratingvaluations –$1,050,000 for 130 Parker Road and $390,000 for 172 Parker Road asat 1 July 2011. The valuer considered that at July 2012 130 Parker Road was worth$800,000 and 172 Parker Road was worth $200,000 - a total of $1,000,000. Thevaluations were inclusive of GST (if any). The report gave a mortgagerecommendation of $100,000 for 172 Parker Road and $548,600 for 130 ParkerRoad. The valuer also gave an opinion as to "current forced sale price range".I quote the report (this is on page 27 of the bundle):The circumstances surrounding a forced sale usually involve the owner beingunder some form of duress or pressure, financial or otherwise, to sell theproperty, or a third party such as a receiver or mortgagee being in possessionof the property.Therefore a forced sale of a property may involve the following:An inadequate exposure to the market;An unreasonably short period in which to achieve a sale;an inappropriate selling method;A vendor with a primary objective of recouping a loan or securedamount rather than obtaining a market price;Potential buyers being aware of the circumstances of the sale and theseller's bargaining position;Other unusual factors.That means that a forced sale usually results in a discount below the market value.[15] The valuer assessed the forced sale value for 130 Parker Road at$640,000-$680,000, a discount of 15-20 per cent below the current market value,and the forced sale value for 172 Parker Road is assessed at $150,000-$160,000, a20-25 per cent deduction from the current market value. The valuer also noted thatthere was a proposed subdivision of the property. The valuer considered the valueof the property if a subdivision were carried out. He assessed the combined valueat $1,050,000 (inclusive of GST). He established that by taking into account anotional gross realisation, and deducting the costs of carrying out the subdivision.[16] The property was marketed by Ray White Western Realty Ltd based inGlen Eden. Glen Eden has a commercial centre which generally services the Oratiaarea. The defendants' evidence includes a report from the land agent on themarketing of the property. The agent reported that there had been advertising inthe "Western Homes publication" and in The New Zealand Herald. It had alsobeen advertised on the internet: Trade Me, RayWhite.com and realestate.co.nz.Open homes had been held. The agent had made follow-up calls to those who hadexpressed an interest in the property. The report named eight potential purchaserswho had shown genuine interest in buying the property. The agent said the feed-back was that buyers were interested in buying at the $750,000 level. The agentwas confident that that figure could be exceeded at the auction.[17] The defendants' evidence does not state exactly when marketing began.However, a marketing calendar shows marketing beginning on 31 January 2013and ending with the auction on 5 March 2013. The report from the land agent canbe taken as evidence showing proper efforts to market the property and engenderinterest in buying it. The marketing plan provides for a sign-board to be erectedon the property, with the agents to market the property at their own sales meetingsand to have open homes on six days (over three weekends). The defendants saythat they have a DVD of the auction, which shows that a significant number ofpeople attended the auction and there were many bidders for the property. Withthis, the defendants say that the property was properly marketed in accordance withthe recommendations of an experienced real estate agent. The overall activity andinterest in the property was very good. A significant of people attended the auctionand there were many bidders. The property was sold at a price within the forcedsale range assessed by the registered valuer the year before.[18] In response, Ms Kerr has relied on the rating valuations in July 2011, givingthe properties a combined rating value of $1,440,000. She has also provided areport by a registered valuer dated 11 February 2013 with a valuation as at7 February 2013. It assesses the market value of the property at $1,265,000including GST. The valuer considers that the most likely purchaser will be adeveloper who obtains a resource consent to carry out the subdivision and sells thelots at a profit. Accordingly, he assesses the value on the basis of a subdivision ofthe properties. The report does not say what the property would sell for to someonewho was not interested in development by subdivision. Nor does the valuer giveconsider what the property would sell for on a forced sale basis.[19] Ms Kerr contends that the marketing of the property was limited and local.She alleges that the sale by auction was a fire sale for a quick commission torecover the amount due under the mortgage without trying for anything more. Shecontends that the defendants' DVD shows people only interested in trying to buythe property below value. She believes that if the reserve were higher theproperties may have sold or may have been passed in but sold for a higher priceafter the auction. She also notes that one of the properties was later sold in 2016for $2.85m with very little in the way of improvements. She has attached anappraisal by another land agent suggesting a possible market value of$1.5m-$1.6m.[20] In reply evidence, the defendants note the difficulties in obtaining asubdivision consent for the Parker Road properties.[21] In her statement of claim, Ms Kerr's complaint is that there was notmarketing over a reasonably long period of time; there was not an extensiveadvertising or promotional campaign and the sale price cannot be reconciled withexpert opinion as to values. To a certain extent she relies on the discrepancybetween the valuations and the actual sale price to contend that reasonable carewas not taken.[22] My assessment is that the defendants appear to have taken conventionalsteps to market the property. If the land agent gives evidence in terms of his report,there would appear to be fairly good evidence that the defendants did take propersteps to market the property, allowing enough time to generate interest, and thatled to a successful auction. It needs to be borne in mind that the defendants wouldhave been motivated to obtain a successful sale as they would want to avoid ashort-fall. Ms Kerr's complaint is that they tried enough to clear their ownmortgage debt but did not try any harder.[23] It is necessary to sound a note of realism. It invariably happens thatmortgagee sales achieve less than sales negotiated freely on the open market. Theglobal financial crash was marked by a number of cases of mortgagees sufferingshortfalls on mortgagees' sales - for example, see Southland Building Society vAustin.4 This case seems typical of that general run of cases. Mortgagors areinvariably disappointed that properties do not sell at market value but it is one ofthe unfortunate facts of life that a mortgagee sale is unlikely to achieve marketvalue.[24] At this stage, I have not heard all the evidence and it may happen that thedefendants' case is not as strong as they make out. But my present impression isthat in taking the steps that are ordinarily expected, a finding of breach of dutyunder s 176 is unlikely. At this stage I assess the odds as against Ms Kerr in beingable to establish a breach of duty under s 176.[25] I mention two matters which I do not consider relevant to the assessmentof the merits.[26] First, the defendants will say that they have a limitation defence. Therelevant limitation provision is s 11(1) of the Limitation Act 2010:11(1) It is a defence to a money claim if the defendant proves that the dateon which the claim was filed is at least six years after the date of the act oromission on which the claim is based (the claim's primary period).4 Southland Building Society v Austin [2012] NZHC 497.[27] The relevant act or omission is the agreement for sale and purchase of theproperty on 1 March 2013. That was an unconditional agreement. The defendantsentered into it in the exercise of their powers under the mortgage. By entering intothe agreement they had to make sure that they complied with their duty under s 176of the Property Law Act. That meant that they had to take steps before enteringinto the agreement to comply with the duty, but it is the making of the agreementthat constitutes the exercise of the power of sale that could potentially give rise toliability. Ms Kerr began this proceeding on 27 February 2019. At that date the sixyears had not expired. The proceeding therefore appears to be within time.[28] For completeness, it is also arguable for Ms Kerr that time did not start torun until settlement of the sale. I do not have to consider that point because theagreement to sell was in any event within time.[29] The other aspect is that Ms Kerr has made some play of the terms of themortgage. She says that while $600,000 was borrowed, $80,550 was immediatelyapplied towards interest up front, and there was a further payment of $12,000 asan establishment fee and $6,000 for brokers' fees. She points out that on the saleof the property $726,148.42 went towards repayment of the mortgage. That is,there was $126,148.42 applied to interest that had accrued. The point here is thatshe does not appear to have made any payments under the mortgage at all. Shewas charged default interest of 18.95 per cent. However, the terms of the mortgageare irrelevant for this proceeding. She was dealing with a second-tier lender, andshe did default under the mortgage. The normal consequences flowed. She is outof time to seek relief under the Credit Contracts and Consumer Finance Act 2003.5[30] I accept the defendants' submission that this is not a case where theybrought about Ms Kerr's impecuniosity. They point out that it was her failure tomeet the outgoings on the mortgage which led to the mortgagee sale.[31] The court must always be wary of barring access to the court by settingsecurity for costs at a prohibitive level. Nevertheless, at this stage the strength ofthe defendants' case is such that they are entitled to protection from a barren order5 Credit Contracts and Consumer Finance Act 2003, s 121.for costs. That is a protection against being sued on a weak case where they areput to substantial costs to defend it. Accordingly, I will order security.Amount of security[32] On the other hand, the amount should not be prohibitive. It should still besubstantial. There is no single right figure or formula for setting security. In thecircumstances of this case, the sum of $20,000 is adequate to meet thecircumstances.[33] I fix the security at $20,000. That is to be paid by 30 October 2020. If itis not paid then, this proceeding will be stayed. If security has not been paid by30 April 2021, the defendants may apply for strike-out. That does not mean thatthe proceeding will be struck out. Instead, it will be for the court hearing theapplication to decide whether to extend the stay notwithstanding the failure to paythe security.[34] The defendants will have costs on this application.Associate Judge R M Bell