SOUTHLAND BUILDING SOCIETY V STEPHEN JAMES BRENNAN AND ERYN LLOYD MOORE HC TAU CIV 2009-470-1109

SOUTHLAND BUILDING SOCIETY V STEPHEN JAMES BRENNAN AND ERYN LLOYD MOORE HC TAU CIV 2009-470-1109 20 December 2011IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV 2009-470-1109BETWEEN SOUTHLAND BUILDING SOCIETYPlaintiffAND STEPHEN JAMES BRENNAN ANDERYN LLOYD MOOREFirst DefendantsAND ERYN LLOYD MOORE AND AMANDAJANE MOORE AS TRUSTEES OF THEMALLARD TRUSTSecond DefendantsHearing: 23 - 26 May 2011Appearances: O G Paulsen for PlaintiffS J Brennan and E L Moore in personJudgment: 20 December 2011JUDGMENT OF KEANE JThis judgment was delivered by on 20 December 2011 at 11.30ampursuant to Rule 11.5 of the High Court Rules.Registrar/ Deputy RegistrarDate:Solicitors:Cavell Leitch Pringle & Boyle, P.O. Box 799, Christchurch 6140.[1] In March 2009 Greenwater Developments Limited, now in liquidation, owedthe Southland Building Society $2,428,572.06; a debt that had accrued under twooverdue 12 month advances for which Greenwater's directors Stephen Brennan andEryn Moore stood liable as guarantors, as did two companies, Awatere TrusteesLimited and Mallard Trustees Limited, both now also in liquidation.[2] SBS then held as security for the first advance a first mortgage over a property owned by Greenwater in Bethlehem, Tauranga; a rear section of by then bare land slightly in excess of half a hectare in size, zoned partly residential and partly rural, with access by right of way to State Highway Two. To secure the second advance SBS held a first mortgage over a second property; a lifestyle block slightly in excess of a hectare in size at Vaile Road, Reporoa, belonging to the family trust of one of Greenwater's directors, Mr Moore.[3] The first advance fell due on 27 April 2008 and the second on 4 September 2008. On 9 - 10 March 2009 SBS served on all with primary or contingent liability notices under the Property Law Act 2007 and, when payment was still not forthcoming, eventually exercised its power of sale. On 30 July 2009, SBS entered into an agreement to sell the Reporoa property for $600,000, from which it derived $573,277.57. On 26 August 2009, it entered into an agreement to sell the Bethlehem property for $335,000 from which it derived $291,345, and recovered $41,875 GST. SBS seeks to recover the balance that it is still owed, $1,708,850.[4] There is in essence only one issue. It is whether SBS, in the exercise of its power of sale, complied with its statutory duty to take reasonable care in each instance to obtain the best price reasonably attainable. Mr Brennan and Mr Moore and the trusts they represent, contend that, in the Bethlehem sale especially, SBS fell well short. SBS, they contend indeed, ought never to have exercised its power of sale as and when it did, let alone marketed the Bethlehem property as a lifestyle block.[5] The Bethlehem land, the developers contend, had strategic value as part of a proposed service station and shopping complex development in which Greenwater was to combine with an unrelated company with at least one common shareholder, Jaglem Limited, which owned the two sections lying between it and State HighwayTwo. Had SBS held back, they held, this might soon have eventuated. By exercising its power of sale as it did, they contend, SBS not only failed to recoup its own advances. It also deprived Greenwater and them of their asset at a gross undervalue, and exposed them to a needless liability. Whether that was so is the essential focus of this decision.[6] The Reporoa property, the developers contend as well, had a greater value than was achieved. SBS rejected an unconditional cash offer from the ultimate purchaser at auction that stood $100,000 higher than the offer eventually accepted. Again, they say, and on that confined basis, SBS exposed both itself and them to needless loss.Three phase development[7] The Greenwater land lies in the 'Bethlehem Triangle' on the outskirts of Tauranga, an area that has recently changed in character both actually and potentially as a result of a change to the district scheme, Plan Change 15, which became operative in January 2007.[8] Plan Change 15 rezoned the land in the triangle from rural to residential A. It called also for two new feeder roads to intersect with State Highway Two, which passes through the triangle from east to west. One, Te Paeroa Road, was to intersect from the north. The other, Parau Road, was to intersect from the south. The three were to meet at a roundabout a short distance to the west of the commercial centre of the triangle. It was on the land around this proposed roundabout that the developers, Mr Brennan, Mr Moore, and later their partner Mr Jones, concentrated their focus.[9] In 2005 two companies in which Mr Brennan and Mr Moore held a controlling interest, Labrador Holdings and then Bethco Limited in its place, made the first of what proved to be, according to the developers, three related strategic purchases in that area.[10] Labrador acquired and later transferred to Bethco four hectares of land to the north of State Highway Two, part of which is now occupied by the roundabout andTe Paeroa Road. Bethco subdivided this land into 11 lots, three of which went to the Tauranga City or Transit New Zealand to create Te Paeroa Road, the roundabout and a reserve and the remainder, in 2006, in sales on terms linking settlement, I understand, to the completion of the roundabout and Te Paeroa Road.[11] To fund this north side development Bethco obtained loans from Dorchester Finance Limited and SBS, which it later repaid by refinancing both with Trimac Finance Limited, a finance company that figures in what is to follow. For an outlay of $8,600,000, it is the evidence for the developers, Bethco obtained a gross return of $13,035,000 and this, they say, was the measure of return they could have anticipated from their next two purchases.[12] In October 2006, again through Labrador, they made their second strategic purchase, this time to the south side of State Highway Two, close to the proposed roundabout. They acquired two sections in the 'Murray Block', lots two and three in a three section subdivision adjoining the state highway, of which the third section to the rear, lot one, is the land in issue in this case. In September 2008 Labrador transferred this holding to a third company Jaglem Limited, in which Mr Moore and the third interested developer, Mr Jones, held the shares together with Mr Jones'company called Mayfield. The price was $2.279M, and this purchase too was financed by Trimac Finance.[13] In December 2006 Greenwater Developments Limited, yet another company in which one or more of the interested developers held the controlling interest made the third strategic purchase. It purchased, lot one, the land in issue in this case. This was the purchase, settled on 4 April 2007 for $1,070,000, for which Greenwater obtained the first of the two 12 month advances in issue, $1,305,000. Greenwater may then have already obtained finance from Marac Finance Limited, or may have done so later. Marac then or later took a second mortgage and SBS's priority sum was capped.[14] The developers made the first of these two south side purchases for two purposes they say. One was to contribute further land to the roundabout and Parau Road, to ensure that both were completed as rapidly as possible and, as well, tocement their relationship with the Tauranga City in order to complete their north side development as they wished to. The other was to obtain a site on the south side for their proposed service station and shopping complex. And the purchase of the third section, that in issue here, they say, was to enlarge the scope for that latter development.[15] The developers, acting through Jaglem complemented by Greenwater, then intended to develop the entire south side subdivision commercially, first by obtaining consent for the service station, then for an outlet for a prominent restaurant chain, McDonalds, and then for other outlets. They expected to make good either by selling their interests, or from rents, and were then confident that in that way they would be able to clear their debt and secure a level of profit. They were confident also that the back section had related potential commercial value.[16] This south side development was contingent on the Tauranga City Council granting resource consent for the service station and in April 2009 Greenwater Finance Limited, a further linked company in which one or more of the developers held a controlling interest, not Jaglem, made that application, advancing a concept that gathered in notionally all three pieces of land, including that in issue.[17] On 19 April 2009 this application, which was endorsed by the city planner, was heard by a commissioner. On 8 July 2009, however, the commissioner declined the application out of a concern that, if it were granted, the effect would be effectively to rezone all three sections commercial, and to isolate two pieces of residential land lying between them and the commercial centre of Bethlehem.[18] Just as complicating was that, even if consent were granted, any sale or lease of the service station and any related outlet was contingent on the completion of the roundabout and Parau Road. At the date of the resource consent hearing the Council had still to acquire the balance of the land necessary on the south side from Jaglem's neighbour to the west, Mr Anderson, with whom it had been negotiating for some years. He refused still to sell. He had also objected to the developers' resource consent application and that too had played some part in the commissioner's decision.[19] In the latter part of 2009, to obtain Mr Anderson's land, and to have him withdraw his objection, those with an interest paid him $225,000. Mr Jones paid him $90,000 and three others, one of whom was Mr McDougal of Trimac Finance, contributed $45,000 each. On 16 November 2009, the Environment Court granted unopposed the resource consent essential for the development. But, by then, any prospect that Jaglem and Greenwater could continue to develop these three sections in concert had ceased to be.[20] At the August 2009 auction of the land in issue here, lot one, in exercise of the SBS power of sale, the Matua Charitable Trust, an entity in which Mr McDougal of Trimac Finance had an interest, took title in Greenwater's place. Furthermore, the developers say, that purchase gave Mr McDougal the ability also to control the development of the front two sections, lots two and three, as well.[21] To optimise access to those two sections Jaglem needed to be able to reposition the right of way over one of them to the back section. Mr McDougal refused to agree and, they say, when asked what he would accept for the back section, he said nothing less than $2M. Just as complicating was that then or not long after Jaglem fell into default to Trimac Finance. Trimac, in reality they say Mr McDougal, then assumed control of the front two sections in exercise of Trimac's power to assume possession.[22] Had SBS withheld its arm for two more months, the developers say, none of this need have happened. Within those two months the Environment Court granted consent for the commercial development of the front two lots, the Council acquired in principle the land needed to complete the roundabout and Parau Road and Jaglem and Greenwater could, as they always envisaged, have developed all three sections in concert.[23] By separating off the rear section from the front and marketing it as a lifestyle block, the developers contend, SBS destroyed its value. SBS made a gift of it to a surrogate of Mr McDougal. It was worth $1.7M more than the price at auction.Power and duty[24] Under the Property Law Act 2007 a mortgagee is given a wide ability to sell land, in exercise of a power of sale reserved under a mortgage; the extent of which is illustrated by the wide variety of ways in which s 178 confirms that a mortgagee may exercise the power.[25] That ability is not unlimited. The essential precondition is the giving of notice under s 119 and the exercise of the power is balanced by the duty imposed by s 176 to take 'reasonable care ... to obtain the best price reasonably obtainable as at the time of sale'. That duty is an aspect, expressed statutorily, of the more fundamental rule of equity governing a mortgagee in the exercise of the power of sale, a duty to exercise the power in good faith to recover the sum advanced; a duty to the mortgagor or anyone else with an interest, qualified or balanced by the mortgagee's legitimate interest in recovering the sum advanced.1[26] In the exercise of the power of sale it is an ordinary part of the mortgagee's duty to take reasonable care to obtain the best price, to select the method most likely to achieve the best price, to advertise with care and, in setting the reserve or asking price, to obtain a current market valuation. So too where there is an expression of interest in the property the mortgagee will be well advised to follow it up. But there is a limit. The duty is not absolute.2[27] In Tse Kwong Lam v Wong Chit Sen3 the Privy Council stated that where there is a challenge the mortgagee must establish that the sale was in good faith and that reasonable precautions were taken to obtain the best price reasonably obtainable. That said, the Privy Council made clear4:The mortgagee is not however bound to postpone the sale in the hope of obtaining a better price or to adopt a piecemeal method of sale which could only be carried out over a substantial period or at some risk of loss.1 Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295.2 Harts Contributory Mortgages Nominee Co Ltd v Bryers HC Auckland CP403-IM00, 19December 2001 at [43].3 Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 (PC).4 At 1355.[28] In Apple Fields Ltd v Damesh Holdings Ltd5 the Court of Appeal confirmed that s 176, then s 103A of the Property Law Act 1952, imposed on the mortgagee a duty of care in negligence coexisting with an equitable duty to act in good faith. The Court said this:6The duty of care owed by the mortgagee is concerned with obtaining the best price reasonably obtainable as at the time of sale. As such, it does not qualify the mortgagee's right to decide in its own interest if and when to sell: ... The reason is that a duty to sell at a particular time or at all would make the business of lending almost impracticable: ...[29] The Court continued to say that once a mortgagee decides to sell, and comes under the related duty of care, what constitutes reasonable care will depend on the case. The ultimate discipline is that the mortgagee will carry the burden of proving to the civil standard that it has complied with the duty. For, as O'Regan J said in Agio Trustees Co Ltd v Krasniqi & Ors:7The determination of the 'best price' in the context of the Apple Fields case is to be assessed having regard to the purpose of s 103A, which is to protect the vulnerability of those to whom the duty is owed, arising from the absence of any incentive for a mortgagee to obtain the full value of the property over and above the sum needed to clear the mortgage debt.[30] Whether the proceeds of sale exceed, or are less than, the sum to be recovered, O'Regan J continued to say:... the essential purpose is the same - to protect the mortgagor ... from a sale at too low a price, leaving a heavy reliance on the personal covenant of the mortgagor for the remainder of the mortgage debt ...[31] Whether SBS complied with its duty of care turns finally on whether it obtained valuations that identified accurately what the highest and best use of the land was, not merely plausibly but realistically, at the date of sale; and whether that potential was promoted by the agents engaged in their marketing campaign and was secured, so far as it could be, in the auction process and thus in the price realised.5 Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586.6 At [49].7 Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd & Ors CP404/381-SDOO, 11 October 2001 at [70(h)].[32] The valuations are, at most, one consideration. They are, however carefully considered, no more than an expression of opinion. What counts, finally, is the interest of the market after the property has been advertised as extensively as it needs to be. For, as Fisher J said in the Harts Contributory Mortgages case, the ultimate test is the auction because 'Valuations lose most of their significance once there has been a properly advertised auction'.8[33] The developers, as I have said, contend that, by any measure, SBS failed in its duty. It failed, they say, and from the outset, to understand what the land was worth and why and how soon it could be turned to real account. Instead of exercising its power of sale, they say, SBS should have withheld its hand, certainly for a matter of months and, had it done so all would have benefited.[34] But that must be set against the nature of the advance and the extent of the default. SBS had not ventured its capital in partnership with the developers. It was not to share in their profit, if any. Nor had it assumed their risk. It had made advances to them on strict terms on which it was entitled to rely.Two 12 month advances[35] In March 2007 Greenwater applied for the first advance of $1,305,000 for 12 months on an interest only basis to purchase the Bethlehem land for $1,070,000.[36] Greenwater then held out, according to the SBS officer in Tauranga responsible, Mr Gawler, and it is undisputed, that Greenwater or related parties had already acquired the Murray block; that there was in place a pre-sale agreement to sell all three sections together for $5.5M; that, subject to due diligence, settlement was to be on 15 October 2007 and that SBS was then to be paid in full. Greenwater also held out that Shell Oil was a keen back-up purchaser for the front part of the land for a service station, but that this was not their preferred option.8 Harts Contributory Mortgages Nominee Company Ltd v Bryers HC Auckland CP403-IM00, 19December 2001 at [49].[37] On that basis, the SBS board approved the loan subject to a commercial loan agreement being entered into, as it was on 23 April 2007, secured by the first mortgage taken over the property and personal guarantees from Mr Brennan and Mr Moore. The advance was made on 27 April 2007, on the express basis that it was for 12 months only, that interest was to capitalise over the term and that any further advance would have to be as a result of a successful application.[38] In August 2007 Greenwater applied for the second advance of $1,020,000, again on a 12 month term interest only basis. The security offered this time was a first mortgage over the property at Vaile Road, Reporoa, belonging to the Moore Family Trust. The stated purpose this time was to repay two mortgages over that property, and to use the balance to complete a subdivision at Te Puna. SBS was to be repaid in the summer on the sale of that subdivision, after Marac and Dorchester had been paid out first, and from the sale of the Reporoa property itself.[39] The two mortgages in SBS's standard form stipulated, as is usual, that in the event of default, most relevantly where 'any part of the Mortgage Debt is not paid on the due date for payment', SBS could:9without giving the Mortgagor any notice or waiting any time except as required by s 92 of the Property Law Act 1952 ... sell or lease the Land or any part of the Land, in such manner and upon such terms and conditions as SBS at its discretion thinks fit.14 month default[40] When they obtained these two advances, the developers clearly had no reason to assume that SBS would extend either beyond 12 months. Nor could they have been under any illusion as to SBS's powers on default when the first fell due on 27 April 2008 and the second on 4 September 2008. Yet they paid interest on the first only until 25 September 2008 and negotiated an informal extension of the first by 14 months and the second by nine months.[41] SBS did not learn, moreover, until 10 June 2008 that the pre-sale agreement, out of which Greenwater was to repay the first advance, had never been entered into.9 Clauses 40, 46.Instead, on that date, Mr Moore told Mr Gawler that the intent still was to sell the entire site, that there were purchasers in sight and that Shell remained enthusiastic. And so it continued. Whenever Mr Gawler contacted Mr Moore, Mr Gawler said and I accept, Mr Moore advised him that each property was close to sale, but was unwilling to ask prospective purchasers to confirm their interest because that might have weakened Greenwater's hand. In one instance he asked whether SBS would entertain a yet further advance.[42] Then, on 16 December 2008, Mr Gawler brought this to a halt. He told Mr Moore that SBS was not prepared any longer to allow the loans to run on indefinitely. In January 2009 SBS sent to Greenwater a letter requiring repayment. In February 2009 it instructed its solicitors, Cavell Leitch Pringle & Boyle, to recover both advances. This led Cavell Leitch to issue in March 2009 the Property Law Act notices on which SBS eventually acted, but this too proved a protracted process.[43] In late April 2009 Cooper Rapley, the solicitors engaged by Mr Moore, urged Cavell Leitch to advise SBS to resume direct contact with him. Mr Moore did not see any need to negotiate with SBS through solicitors. Cavell Leitch said, however, that SBS had no wish to resume discussions with Mr Moore that had led nowhere. SBS, they said, would only withhold exercising its power of sale if Greenwater made a significant payment of arrears. Arrears then stood at $172,000.[44] Then, between late April and late July 2009, Cooper Rapley continued to press Cavell Leitch for informal extensions, very much as the developers had pressed SBS. This continued until 29 July 2009, when Cavell Leitch pointed out thatGreenwater's debt then exceeded $2.5M, that it was increasing by $21,000 each month, that there had been no payment since September 2008 and that SBS saw no choice but to exercise its power of sale.[45] By that point certainly, I consider, indeed at a very much earlier point had it chosen, SBS was fully entitled to elect to exercise its power of sale of both properties. Some 14 months had passed since the first loan fell due and SBS had no reason to be confident that the Bethlehem land was soon to be turned to anycommercial account from which it might expect any immediate benefit. It had no cause for any confidence either, as to any imminent sale of the Reporoa property.[46] The Bethlehem land was zoned residential - rural, as indeed then still remained the Jaglem land in front. The compromise that led to that land being put to commercial use by resource consent had still to be struck and for that to take effect, furthermore, the roundabout and Parau Road had to be completed. Jaglem was by then, moreover, standing at a remove from Greenwater and was itself imminently at risk of default to Trimac Finance The only issue that there can be is whether SBS, as the developers say it did, denuded the Bethlehem land of value by its marketing process.[47] The issue as to the Reporoa property is more simple. The developers have not attacked the marketing process for that property as such. They say rather that it was uncalled for; that SBS perversely declined an unconditional offer from the ultimate purchaser before it began that process, which was in excess of $100,000 more than the price realised. That possibility can be more shortly disposed of. It came about in this way.Reporoa sale[48] On 5 May 2009 Cooper Rapley emailed Cavell Leitch to say, amongst other things, that there was to be an unconditional offer for the Reporoa property for $700,000. They asked whether the proposed agreement for sale and purchase could be executed within the next two working days. It was a 'one off' offer.[49] On 6 May 2009 Cavell Leitch asked whether the proposed purchase was at arm's length and for a copy of any agreement for sale and purchase. It said also that SBS could not begin to assess any offer until it had its own valuation. On 7 May 2009 Cooper Rapley advised that the proposed sale was at arm's length but that there was not as yet anything in writing. To that, Cavell Leitch immediately responded, SBS's position remained as stated.[50] On 13 May 2009 Cooper Rapley wrote to say that the prospective purchaser wanted to see SBS's own valuation of the property. SBS had commissioned a valuation, which it had still to receive, to fix the value of the property in case it needed to exercise its power of sale. It could not, it considered, disclose that valuation to any potential purchaser without breaching its duty to obtain the best possible price. It said so immediately.[51] On 21 May 2009, SBS received its valuation, ascribing to the property a current market value of $600,000 and a value on a forced sale of $460,000 - $485,000; figures that can only have suggested to SBS that it was unlikely to recover more than half the second advance secured. (SBS's Bethlehem valuation, to which I will come shortly, was equally bleak.) So Cavell Leitch emailed Cooper Rapley and invited Greenwater to explain how, within three months, it proposed to meet its increasing liability.[52] On 5 June 2009 Cooper Rapley again asked for an informal extension, this time of the Bethlehem advance, but assured Cavell Leitch that Greenwater hoped to refinance both advances and by that means, and by the sale of the Reporoa property, to meet its increasing debt. The agreement relating to the Reporoa property, they said, was to be to hand shortly.[53] Finally, on 29 June 2009 Cooper Rapley assured Cavell Leitch that the Bethlehem development remained on track, but said that, because SBS had not accepted $700,000 for the Reporoa property, the potential purchaser was seeking a valuation. Cavell Leitch did not accept that criticism. There had not ever been any written offer for the Reporoa property. Indeed, before the auction there never was.[54] If a definite offer had been made for the Reporoa property, SBS would have been obliged, obviously, I consider, to take that into account before embarking on the marketing process. The price ostensibly offered exceeded, according to SBS's valuation, the likely value of the land on an unforced sale basis and was well above that likely on a forced sale. But no such offer was ever made, and that, I consider also, cannot be attributed to SBS.[55] SBS was right to decline to release to any potential purchaser a copy of its valuation. To have released that report would have been quite inconsistent with SBS's duty to obtain the best possible price on the exercise of its power of sale. If the proposed purchaser did obtain a valuation, as Cooper Rapley said was to happen, that might well explain why no offer was made until the auction and why that then successfully made was $100,000 less than that first intimated.Bethlehem sale process[56] The more significant issue is whether the Bethlehem marketing process (apart from the question whether it was premature that I have already resolved) was so ill-executed as to denude the property of its market value and, as to that, the developers advance three criticisms.[57] The property, they say first of all, should never have been marketed independently of the Jaglem land as a lifestyle property. It had commercial worth. The agent, Jeremy Pryor of Success Realty Limited, trading as Baileys, Tauranga, they say secondly, was unqualified to market it. He specialised in rural and lifestyle properties, not commercial property. And, they say thirdly, he was negative during the marketing phase and at auction.[58] The effect, they say, was that Mr McDougal, the only prospective purchaser who knew the property's potential worth, effectively became the only player left. He derailed the bidding process at auction, they contend, and obtained the property for a gross undervalue.[59] SBS responds to the first of these criticisms by saying that the decision to market the property as a lifestyle block was made, as Mr Pryor confirmed, because it could not be marketed with the Jaglem land as possessing commercial potential. It had to be marketed by itself, zoned as it was residential and rural. It had limited access to State Highway Two, and a significant part was unusable for any commercial purpose because access was by right of way and a large part was steep gully.[60] Whether that marketing choice was right is an issue to which I will return when I come to the valuation evidence. I begin rather with the marketing campaign which the developers do not appear to attack as such and which indeed was, on the face of it, completely orthodox.Marketing campaign[61] Over the four weeks of the campaign, which began on 16 July 2009 and continued until auction on 26 August 2009, the property was advertised at Bayleys' branch offices in Tauranga and Mt Maunganui, and it seems those of its related agency, Eves Real Estate, and thus at eleven offices in all. It was advertised on Bayleys' website, in emails to customers on Bayleys' database and in a local newspaper. Agents at all eleven branches were briefed.[62] Marketing during the first two weeks was on the basis that this was an ordinary sale, but elicited hardly any interest. The only visitor to the property, apart from a single telephone inquiry, was the eventual purchaser, Mr McDougal. In the last two weeks, when the property was advertised for mortgagee sale, two persons inspected it in the third week and seven in the fourth. Of these a number, Mr Pryor says and I accept, were experienced commercial developers and none expressed any interest.[63] The developers, whose case this is, strongly criticised Mr Pryor for advising Cavell Leitch, in an email dated 24 August 2009, that the property was a 'real nightmare'. That, however, Mr Pryor said, and I accept, was what those who inspected it said about it. They did not find it appealing as a lifestyle block or as a freestanding development of any sort. It was hemmed in by the proposed service station in front, by properties of poor quality to the side, and by a steep gully behind. It lacked an attractive view. In a depressed market it did not compare well with a number that were not selling and were far more attractive.[64] Mr Pryor did say that when he became aware that the Jaglem property was to be developed commercially, he approached Mr Brennan to find out more. He hoped to market the back section as a possible adjunct to the Jaglem land but Mr Brennan,he said, while at first encouraging, was finally unforthcoming. I accept that evidence also and so the issue remains, as with the auction, whether the land should ever have been marketed when and as it was.Auction[65] The criticisms the developers make of the auction, that Mr Pryor denigrated the property and that Mr McDougal derailed the bidding process, I have to say immediately, lack any basis in the evidence. Not one of the developers was at the auction and their criticisms derive rather, it seems, from a person who was there but whom they elected not to call as a witness.[66] Bayleys' video record of the auction, moreover, confirms that it was conducted orthodoxly and I have no reason to be sceptical about Mr Pryor's evidence that it was in Bayley's interests, and his own, to see that the property sold at the best possible price. Why he might have denigrated it is inexplicable. That could only have had an adverse impact on his commission.[67] Equally, the fact that Mr McDougal proved the only bidder and that he secured the property for $335,000, though he said later that he would only sell it for $2M, does not mean that he derailed the bidding process. Again as to that there is no evidence. The only evidence is that there were no more than two other potential bidders. One was the son of one of the three developers, Mr Jones, who it appears elected not to bid. The other bidder did make a number of bids, but did not persist.[68] That the price was as low as it was is not attributable, I find, to the conduct of the auction. It is attributable to the low level of interest in the property. And the fact that it passed to a surrogate of Mr McDougal is unsurprising. He was the only person who had any potential ability to turn the back section to account in concert with the Jaglem land, assuming always, of course, that Jaglem remained in default and Trimac Finance remained able to exercise its powers as mortgagee in possession.[69] There is also this to consider. If the developers did think there was any risk that the property might go at a gross undervalue, they could have bid themselves.That might at least would have forced up the price to one that was closer to their notion of market worth. The fact that they did not attend the auction, and were not represented, has to be telling, more especially when one turns to the valuation evidence.Divergent Bethlehem Valuations[70] The price achieved at auction is consistent with the valuation obtained by SBS for the purpose of sale, the Hills Hayden's valuation, dated 6 May 2009, made by Jason Coulson, who gave evidence at the hearing.[71] Hills Hayden ascribed to the land a value of $350,000, if sold as a large residential site, and a value of $245,000 if there were a forced sale. It ascribed to the land, taking into account its 'commercial potential', a value of $840,000 if developed with a 'neighbour', implicitly Jaglem or any successor in title, and $560,000 if developed by itself. But these latter values assumed a purchaser able to exploit any eventual opportunity.[72] This valuation stood in stark contrast to the two valuations that the developers obtained for SBS in 2007, the first from Tierney & Partners, dated 28 February 2007 before the first advance was made; the second from Bay Valuation Limited, dated 31 July 2008, after it was made, for some purpose that is not immediately obvious on the evidence.[73] At the date of all these valuations, and at the auction date, the rateable value of the section, fixed as at 1 July 2006 when the market stood higher, even then was modest. The capital value ascribed was $790,000 and the land value $605,000. The value of improvements was then $185,000 but by early 2007 certainly the improvements, green houses and the like, had been removed. At the date of the auction the section remained bare land as it does to this day.[74] Tierney & Partners valued the section, as they said, very cryptically, on the basis of 'Comparable Market Evidence, Principles of Added Value'. They set out the effect of Plan Change 15 and the permissible uses within a residential A zoning.They described Bethlehem as a suburb that had been earmarked by the Council for residential development, once the centre of Tauranga, ceased to be capable of further infill. They saw this as likely to bring impetus to the commercial development of the area.[75] On that basis and a comparison with three properties, they ascribed to the bare land a current market value of $2,185,000, allowing $10,000 for fencing. They expressed the opinion that it would support an advance of $1,311,000, which was well in excess of the then proposed SBS advance. And the Bay Valuation Limited valuation in July 2009, made by its principal Bruce Fisher, who gave evidence for the developers at the hearing, must then have been equally reassuring to SBS.[76] In that valuation Mr Fisher described the land as 'a rare block of residential zoned land with current right of way access from the State Highway Two frontage'.He said that it was 'well located just on the western side of the current old established commercial district in Bethlehem on the State Highway Two frontage'.He gave especial emphasis to how close it was to the roundabout:Clearly, the future development potential development of the land will be associated with the proposed new roading pattern and its influence on the land between this property and the State Highway Two frontage. Clearly, the land is ideal to be amalgamated even with part of the land at the State Highway Two frontage for efficient, intensive use residential purposes.[77] Mr Fisher ascribed to the property a current market value of $1,845,000, on the basis of an analysis of recent sales in the area, especially those making intensive use of residential properties. He said it would be adequate security for an advance up to $920,000.[78] In his most recent valuation, dated 30 March 2011, Mr Fisher valued the property at the date of auction at $1,525,000 relying as he did in 2009 on what he calls 'the englobal market sales evidence', the effect of Plan Change 15, especially the roundabout and the new roads intersecting there, and value added by the Jaglem land. He relied also on a September 2008 arbitral award compensating the developers for the three sections of land taken on the north side for roading and reserve.[79] Even as presently zoned, Mr Fisher pointed out, one permitted activity was subdivision, allowing one independent dwelling unit per 325M2 of site area. Hypothetically, Mr Fisher considered, if the land were developed as intensively as it could be, there could be as many as 21 residential sites. Nor, he said, despite a recent Council decision under appeal, was commercial development ruled out. Two nearby properties, the service station and a commercial office, had resource consents for commercial use.[80] By contrast, the second valuer on whom SBS relies, James Bennie, valued the property retrospectively in February 2011 as at the date of auction, 26 August 2009, as then having a value of $400,000, a valuation very much closer to that made by Hills Hayden before SBS exercised its power of sale.[81] Mr Bennie took a much less sanguine view of the property than Mr Fisher. He described it in this way:The property is a rear allotment, having right of way access some 80 metres long and no profile from the main road. All immediate surrounding property is zoned residential or rural, with known Council policy at the time being not to increase the commercial zoned areas in Bethlehem and across the district. In addition, Plan Change 48 (not operative at the time but was notified) reduces permissible commercial activities in a residential zone. This would not necessarily have precluded commercial development, but any approval would have had to be by way of non-complying consent.[82] Mr Bennie also considered it imprudent to give the land as at the date of auction any increment of value for commercial potential. It was separated from the commercial centre of Bethlehem by two residential properties. The Council was against any change in commercial zoning taking place. There were vacant retail shops in Bethlehem and market conditions were weak. He also considered that any attempt to develop the property more intensively would result in increased traffic flows on State Highway Two and that would be resisted by Transit New Zealand.[83] To confirm his valuation Mr Bennie also assessed what the property was worth for a five lot subdivision and a 10 lot subdivision. The first, he considered, would result in a lot value of $325,000, and the second a lot value of $227,000. Neither, he concluded, would assure a return sufficient to induce a developer to pay a premium for the land's intensive residential potential. Rather, he concluded:The most likely sale prospect for the property at the date of sale was to someone prepared to use it for lifestyle purposes with the knowledge that the property has some longer term potential.[84] As a result of a pre-trial direction, Mr Fisher and Mr Bennie conferred before the hearing but continued, predictably, to differ as to the highest and best use of the land at the date of auction and thus also as to the properties with which it was to be compared to establish a relative value.[85] In the broadest sense the valuers for SBS fix their focus closely on the value of the land as it was at the date when SBS was to exercise its power of sale. They discount the value that it might once have had when Greenwater purchased the property and, shortly after, when SBS provided the first advance. The market was then at a peak. They discount the potential the land might have in the future as the Bethlehem triangle evolves.[86] The developers, by contrast, rest on Mr Fisher's 'englobal' approach, a word yet to be recognised in the Oxford English Dictionary, which must derive from the verb 'englobe'; his all encompassing valuation relying on the past and likely future evolution of the Bethlehem triangle from rural to residential to possible future commercial zoning, which fixes on the land's possible future rather than present value.Conclusions[87] These valuations are detailed, especially as to the comparative sales on which they rely, but finally they seem to me to turn on how realistically they reflect the position and the state of the land as it was for auction on 26 August 2009, having regard to the state of the market as it then was; and against that measure I prefer, unhesitatingly, the valuations of the SBS valuers.[88] The land at that date could only have had commercial potential if it had been amalgamated with the Jaglem lands and the only possible purchaser with that ability was Mr McDougal, or his surrogate. Nobody else then in the market had that ability or thus that interest; and that must mean that its value at auction, such as it was,could only be as a free standing property with residential and rural uses. It was unattractive for any intensive residential development, as the SBS valuers said, and was only perhaps attractive as a lifestyle block with commercial potential. But once again, as became evident, only to the right purchaser.[89] The price obtained, I consider also, was intelligible when set against the state of the market. The evidence of the SBS valuers, which I accept, is that consumer confidence was then at a low point. Sales were down significantly on the year before. There was an over-supply of apartments and vacant sections, a number of which were more attractive than lot one. Section values had fallen and the possibility then existed that they would fall further.[90] The developers' valuation, by contrast, relied more on sales values at the peak of the market in excess of a year before and on the developers' favourable 2008 arbitral award for the land compulsorily taken for the roundabout and Te Paeroa Road and reserve. But, in principle, the values of compulsorily taken land and land to be sold on a forced sale basis cannot be comparable. And, that apart, the arbitrator himself said that the north and south side properties were not to be compared.[91] The ultimate test, I remain satisfied, has to be the price obtained at auction, more especially given, as I have found, that it was preceded by a fully orthodox marketing campaign. The price obtained vindicates the SBS valuations and can only mean that the developers' valuation was more notional than real. Conversely, the SBS valuations explain why the price was as low as it was.Outcome[92] SBS is entitled, I find, to the judgment it claims against the developers and their related companies on their guarantees for the undisputed sum owing in respect of the two advances, less what was obtained at auction of the two properties, $1,708,850.91, together with interest at the default rate, 10.20% as set out in its statement of claim. The defendants' affirmative defences fail. I give judgment accordingly.[93] SBS is also entitled to costs on a solicitor and own client basis, on the basis set out in the statement of claim, together with disbursements as fixed by the Registrar. I make an order accordingly._____________P.J. Keane J