SOUTHLAND BUILDING SOCIETY v PATRICK LYALL NICHOLAS [2015] NZHC 1141

SOUTHLAND BUILDING SOCIETY v PATRICK LYALL NICHOLAS [2015] NZHC 1141 [26 May 2015]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV-2014-470-152[2015] NZHC 1141BETWEEN SOUTHLAND BUILDING SOCIETYPlaintiffAND PATRICK LYALL NICHOLASDefendantHearing: 26 May 2015 at 10:00amAppearances: N Elsmore for the PlaintiffP L Nicholas, Defendant in personJudgment: 26 May 2015ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELLSolicitors:Preston Russell Law (Sarah N McKenzie) Invercargill, for PlaintiffHolland Beckett (Mark Beech) Tauranga, (previous solicitors for Defendant)Copy for:G C McArthur, Barrister, TaurangaThe claim[1] The Southland Building Society sues Mr Nicholas as guarantor for the shortfall it suffered when it sold properties over which it had a mortgage. The Building Society has applied for summary judgment against Mr Nicholas.[2] At the early stages of this proceeding, Mr Nicholas had lawyers acting for him. They have applied to be released from representing Mr Nicholas. On his behalf they applied for legal aid but the application was unsuccessful. At the start of the hearing I granted leave to the lawyers to withdraw. Mr Nicholas has appeared in his own right. Before the hearing, a notice of opposition was filed on behalf of Mr Nicholas and he swore affidavits in opposition. He also spoke in opposition to the application. Mr Nicholas has opposed the summary judgment application on the ground that under s 176 of the Property Law Act 2007, the building society did not take reasonable care to obtain the best price reasonably obtainable at the date of sale.Summary judgment principles[3] The principles that apply on a summary judgment application are these:1[a] The question is whether the defendant has no defence to the claim; that is, that there is no real question to be tried.[b] The onus is on the plaintiff, but if the plaintiff's evidence is sufficientto show that there is no defence, the defendant will have to respond if the application is to be defeated.[c] The court will not normally resolve material conflicts of evidence or assess the credibility of deponents, but it need not accept uncritically evidence that is inherent lacking in credibility.1 Krukziener v Hanover Finance Ltd [2005] NZCA 187, (2008) 19 PRNZ at [26].[d] At the end of the day, the court's assessment of the evidence is amatter of judgment and the court is entitled to take a robust view and a realistic approach when the facts warrant it.The facts[4] Mr Nicholas is sued as guarantor of a company, YY Ltd, of which he is director. He signed a deed of guarantee in favour of the building society on 23 September 2014. As is typical of guarantees for financial institutions, the guarantee is comprehensive. There are ample provisions directed at protecting the position of the building society as much as possible. It is not disputed that the debtsthe subject of the building society's claim are within the guarantee.[5] The building society made two loans relevant to this proceeding. The first is a residential investing transactional facility agreement of 29 April 2011. Under this agreement, YY Ltd could take drawings up to a maximum sum of $411,236. There were conditions in the facility allowing the building society to call for payment upon demand. The ordinary interest rate under the facility was 6.15 per cent per annum; the default interest rate was 14.15 per cent per annum.[6] The second loan was under a commercial term loan agreement for a period of 12 months. The ordinary interest rate was 7.4 per cent per annum; there was a default interest rate of 15.4 per cent per annum.[7] As security, YY Ltd gave the building society a mortgage over four properties at 79, 115, 117 and 129 Watling Street, Gate Pa, Tauranga. The bank has not put the mortgage in evidence but it has put in evidence copies of the certificates of title showing that the mortgage was registered. I take judicial notice that the mortgage had a power of sale upon default by the mortgagor. That is not in issue.[8] YY Ltd did not repay the commercial term agreement at the end of the 12 months, when the principal fell due. In July 2014 the building society gave a notice of demand to YY Ltd calling for repayment of the residential investment transitional facility plus the amount owing under the term loan and also sums said to be dueunder the unauthorised overdrawn transactional account and overdue interest. The building society also made demand on Mr Nicholas under his guarantee for the same sums.[9] Neither YY Ltd nor Mr Nicholas complied with those demands. The building society then served on YY Ltd a notice under s 119 of the Property Law Act 2007. It also served a notice under s 122 on Mr Nicholas together with the s 119 notice. The s 119 notice required YY Ltd to remedy the defaults that were the subject of the notice of demand of July 2014. Because of the July 2014 demand the sums in the s 119 notice had already fallen due before the s 119 notice was served. The last day for remedying the defaults was 10 September 2014. There is no dispute as to the issue and service of the notices.[10] The s 122 notice to Mr Nicholas advised that if defaults continued after 10 September 2014 the building society intended to exercise its powers of sale, and also to take action to recover any deficiency should the amount that was realised from the sale be less than the amount required to pay the mortgages in full.[11] The building society began this proceeding before the properties were sold, but the summary judgment application has been heard after all the properties had been sold. The defaults were not remedied by 10 September 2014. As a result, the bank became entitled to sell all the properties in Watling Street. In fact, the bank sold only two of them - at 79 and 129 Watling Street. With the building society'sconsent, YY Ltd sold 115 and 117 Watling Street. These were bare sections. Thebuilding society's evidence is that after the costs of sale, the net proceeds of thesections were about $90,000.[12] Since YY Ltd sold those properties itself, there is no basis for any complaintas to those sales. Instead, Mr Nicholas' defence is about the way the building societywent about selling 79 and 129 Watling Street.Property Law Act 2007 s 176[13] In Public Trust v Ottow, Asher J set out the principles that apply when the court considers whether a mortgagee has complied with its duty under s 176 of the Property Law Act 2007:2[a] A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee,who can sell at any time in accordance with the mortgagee'sconvenience: Raja (Administratrix of the Estate of Raja (Dcd)) v Austin Gray (A Firm) [2002] EWCA Civ 1965 at [55], per Peter Gibson LJ; Silven Properties v Royal Bank of Scotland[2004] 1 WLR 997 at [14].[b] The mortgagee's duty of care is to take reasonable care to obtainthe best price reasonably obtainable at the time of sale: Agio Trustees Co. Ltd v Harts Contributory Mortgages Nominee Co. Ltd(2001) 4 NZ ConvC 193,480 (HC).[c] It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: Tse Kwong Lam v WongChit Sen [1983] 1 WLR 1349 at 1355B; Silven Properties v Royal Bank of Scotland at [14].[d] A mortgagee is under no obligation to improve the property or increase its value: Silven Properties v Royal Bank of Scotland at [16].[e] A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care: Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 at [61].[f] A mortgagee does not have any general duty to maintain properties prior to sale: Silven Properties v Royal Bank of Scotland at [16].[g] Following the service of a Property Law Act Notice there is no duty on a mortgagee to keep a guarantor informed of sales activities: G Merel & Co. Ltd v Barclays Bank (1963) 1 SJ 542.[h] The mortgagee is not entitled to sell in a hasty way at a knock- down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained: seePalk v Mortgage Services Funding Plc [1993] 1 Ch 330 at 337-8.2 Public Trust v Ottow (2010) NZCPR 879 at [17].[i] Proper care must be taken to expose the property to the market and to obtain the best price reasonably obtainable: Harts Contributory Mortgages Nominee Co. Ltd v Bryers HC AK CP403-IM00 19 December 2001 at [43](d) and (f).[14] He also said:3The following steps indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:(a) The appointment of a reputable real estate agent to market the property.(b) Obtaining a valuation report from an experienced valuer as a guide to what 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 with expert opinion as to value.And:4A failure to achieve an assessed valuation price at a mortgagee sale is not initself any indication of a breach of the mortgagee's duty of care toobtain the best price reasonably obtainable: Moritzson Properties Ltd v McLachlan at [61]. A failure to achieve a price that a mortgagor believes the property should achieve, does not give rise to an inference that a mortgagee has breached its duty to take reasonable care: Wallace v Bank of New Zealand HC AK CIV-2009-404-3534 1 July 2009 Wylie J, at [54]. Of course, a sale at a price which is much less than the assessed value, when there is no explanation for the discrepancy, can indicate a failure to take reasonable care.Valuation[15] In May 2014 – before the building society had served its notices under ss 119 and 122 of the Property Law Act - the building society instructed registered valuers in Tauranga to inspect and give a report as to the market values and forced sale3 At [31].4 At [33].values of 79 and 129 Watling Street. For both reports the date of valuation is 27 May 2014. The property at 79 Watling Street is described briefly:Built about 2011, this is a two bedroom detached home with one bathroom situated upon the 618ms site within the Gate Pa locality of Tauranga City. At the time of inspection the dwelling did not have a code compliance certificate.[16] The property at 129 Watling Street is described briefly as follows:Built about 2011, this is a two bedroom detached home with one bathroom, situated upon a 213ms site within the Gate Pa locality of Tauranga City. At the date of inspection the dwelling did not have a code compliance certificate.[17] It appears that both properties required further work. In particular a retaining wall was required to serve both properties. The valuers factored in the need for the retaining wall and the need for the local authority to be satisfied as to these works in their valuations of both properties. The valuers assessed the market value of 79 Watling Street at $133,000 including GST. They were of the view, having assessed recent forced sales data, that forced sales took the likely price to 15-30 per cent below normal value. They assessed a forced sale price for 79 Watling Street as between $90,000-$110,000 including GST. For 129 Watling Street, they assessed the market value at $109,000 including GST. Again they applied a similar discount for a forced sale, assessing the value at $76,000-$93,000 including GST. Again, the valuers assessed the need for a retaining wall and for the local authority to be satisfied as factors going to the value of the property.[18] At about the same time, Mr Nicholas arranged for a firm of local real estate agents to provide appraisals of the properties. The appraisal was called a"Comparative Market Analysis Report". Each report contains a recommendation directed at "providing a recommended selling range, list price, and recommendedsale method based on an analysis of comparable recent sales in the area and using thelatest market trends."[19] It has to be said that these reports by land agents were not made by registered valuers. Mr Elsmore submitted that they should be put to one side, as having no relevance at all. Mr Nicholas has not provided a report from a registered valuer:apparently arrangements were intended to be carried out to provide a valuation butthat has not come to fruition. The land agents' appraisals are some evidence on Mr Nicholas' side as to the potential value of the properties. The agents gave a sellingrange for 79 Watling Street of $200,000-$230,000 for sale by auction, and 109 Watling Street a recommended selling range of $175,000-$200,000 for sale by auction. Both the reports assumed that the retaining wall and driveway would be completed and signed off by the council and there would be a general site clean-up.[20] The building society asked another firm of land agents in Tauranga for advice as to marketing and sale of all of the mortgaged properties. The building society asked for this report after the notices under ss 119 and 122 of the Property Law Act had been served, but before the time for remedying the defaults expired. The landagents' report of 29 August 2014 advised that on a forced sale of 79 Watling Street, a price of $140,000-$160,000 could be expected, and for 129 Watling Street a price of $130,000-$145,000 could be expected.[21] The land agents recommended a four week marketing programme to obtain the best possible result, and marketing the properties together as one parcel and, if unsold, then have the auction to follow on immediately with individual auctions for each home. They recommended a marketing campaign which would include advertisements in the Property Press, professional photography, a sign-board, and advertising on real estate websites, brochures, window displays, open homes and the like. The building society instructed the land agents to begin the marketing programme almost immediately after the time for complying with the s 119 notice had expired.Evidence as to marketing[22] The evidence as to marketing the properties for sale comes from an officer of the building society. As its name suggests, the building society is based in Invercargill and the officer swore his affidavit in Invercargill. There is no evidence that he personally conducted the marketing or has any first-hand knowledge of marketing or sale of the properties. He has given second-hand evidence.[23] In the hearing, I was concerned that this was inadmissible hearsay evidence. I find it surprising that the building society relied on hearsay evidence. In other summary judgment applications I have dealt with, where the mortgagor or guarantor runs a defence under s 176 of the Property Law Act, it is an invariable practice for the mortgagee to have land agents responsible for marketing and selling the property give evidence as to the steps taken. See for example Southland Building Society v Austin.5[24] I do not regard the building society as having satisfied s 18 of the Evidence Act which provides for general admissibility of hearsay evidence. Under that section hearsay evidence is admissible only if the maker of the statement is unavailable as a witness. Under s 16(2) of the Evidence Act 2006:a person is unavailable as a witness in a proceeding if the person—(a) is dead; or(b) is outside New Zealand and it is not reasonably practicable for him or her to be a witness; or(c) is unfit to be a witness because of age or physical or mental condition; or(d) cannot with reasonable diligence be identified or found; or(e) is not compellable to give evidence.[25] The building society has not tried to show that a Tauranga-based land agent is unavailable in terms of that provision. I accept that a local land agent, at a hearing in the Tauranga High Court, could readily be available to swear an affidavit as to marketing of the properties. That would not amount to undue delay or expense. Accordingly, s 18 does not allow me to accept the evidence.[26] However, Mr Elsmore relied on the hearsay statements in the buildingsociety's affidavits as being contained in business records. Section 19 of the Evidence Act says:5 Southland Building Society v Austin [2012] NZHC 497.19 Admissibility of hearsay statements contained in business records(1) A hearsay statement contained in a business record is admissible if—(a) the person who supplied the information used for the composition of the record is unavailable as a witness; or(b) the Judge considers no useful purpose would be served by requiring that person to be a witness as that person cannot reasonably be expected (having regard to the time that has elapsed since he or she supplied the information and to all the other circumstances of the case) to recollect the matters dealt with in the information he or she supplied; or(c) the Judge considers that undue expense or delay would be caused if that person were required to be a witness.[27] I accept that the documents that the building society has put in evidence doconstitute "business records" as defined under s 16(1) of the Evidence Act. That isbecause the documents that the building society relies on are reports supplied by its land agent in complying with a duty as agent to market the properties on behalf ofthe building society. However, alleging that the statements are "business records" isnot by itself enough. The building society also needs to satisfy the other requirements of s 19. Sub-clause (a) does not apply because I am not satisfied that the person who supplied the information, the local manager of the franchisee, is unavailable as a witness. As to (b), I do not accept that no useful purpose would be served by requiring the land agent to provide evidence. I would expect the land agent to be able to recollect the marketing steps taken. For (c) I do not consider that requiring the land agent to provide an affidavit would cause undue expense or delay.[28] Accordingly I do not find that the requirements of s 19 of the Evidence Act have been made out.[29] On that basis the evidence as to marketing and the conduct of the auction that the building society is relying on for its summary judgment application is inadmissible hearsay. I therefore cannot take that evidence into account.[30] That leaves a gap in the case for the building society. The building society has an onus to show that Mr Nicholas does not have any defence. Mr Nicholas hasput in issue non-compliance with s 176 of the Property Law Act. To show that Mr Nicholas has no defence, the building society needs to show that appropriate marketing was undertaken. The building society has not proved that by admissible evidence. On that basis, I am not satisfied that the building society has shown that Mr Nicholas does not have a defence based on s 176 of the Property Law Act.Result[31] Because of this gap in the evidence, I am unable to make an order for summary judgment in favour of the building society. I accordingly dismiss the summary judgment application.[32] I reserve costs. In doing so, I apply the principles in NZI Bank v Philpott.6[33] I direct a telephone conference on 22 July 2015 at 2:15 pm. I ask the building society to file and serve a memorandum for the conference five working days beforehand, and Mr Nicholas should file a memorandum for the conferencetwo working days beforehand.[34] I understand that since I gave this decision in court, Mr Nicholas has arranged legal representation again. A copy of this judgment is to be sent to his counsel...............Associate Judge R M Bell6 NZI Bank v Philpott [1990] 2 NZLR 403.