Australia and New Zealand Banking Group Ltd v Pollard (No 2)

[2012] SASC 133

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD  v  POLLARD & ANOR (No 2)

[2012] SASC 133

Reasons of Judge Lunn a Master of the Supreme Court

1 August 2012

REAL PROPERTY

Application for possession - whether compliance with s 55A(1) Law of Property Act 1936 in service of default notice - whether enforcement costs claimed in notice were reasonable - what work could be the subject of those costs - whether some work was done prematurely - held of costs claimed of $755 only $278 were reasonable.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD  v  POLLARD & ANOR (No 2)
[2012] SASC 133

JUDGE LUNN:

Further reasons on reasonableness of enforcement expenses

1. In my earlier reasons[1] I said the following about the background of this matter:

   [1] 31 May 2012, [2012] SASC 91 (FDN16).

   1      The defendants mortgaged their property at Port Vincent to the plaintiff to secure monies owing by them to the plaintiff.  The defendants have defaulted in making the payments due under that mortgage.  The plaintiff’s solicitors, Fisher Jeffries, arranged for All State Interstate Pty Ltd, a licenced process server, to serve a default notice dated 28 June 2011 (“the default notice”).  This notice was served on 30 June 2011 by a process server delivering it to the property at Port Vincent and by affixing copies for each defendant on the back door of the house on the property which was apparently then unoccupied.  The default notice, inter alia, required payment of enforcement expenses of $755.66 by the rectification date of 14 August 2011.  This sum was not paid by that date.

   2      It was common ground that the provisions of the National Credit Code (“NCC”) applied to the mortgage.

   3 On 20 December 2011 the plaintiff issued this summons under Part 17 of the Real Property Act seeking an order for possession of the property. On 2 May 2012 the defendant took out an interlocutory application (FDN8) seeking various relief including that the action be dismissed. The dismissal was sought on the ground that the default notice was defective in that the enforcement expenses claimed of $755.66 were excessive. It was agreed that I would deal with this as a preliminary issue together with any entitlement of the plaintiff to a dispensation from the requirements of the NCC and s 55A of the Law of Property Act if I found that the enforcement expenses were excessive.

   4      The mortgage entitled the plaintiff to recover its legal costs incurred in enforcing the mortgage on a full indemnity basis.

   5      However, s 107 of the NCC provides:

   107    Recovery of enforcement expenses

   (1)     A credit provider must not recover or seek to recover enforcement expenses from a debtor, mortgagor… in excess of those reasonably incurred by the credit provider…

   (2)     Any provision of the credit contract, mortgage… that appears to confer a greater right is void…

   (3)     If there is a dispute between the credit provider and the debtor, mortgagor… about the amount of enforcement expenses that may be recovered by the credit provider… the court may, on application by any of the parties to the dispute, determine the amount of that liability.

   6      Section 107 limits the plaintiff’s right to recover legal and associated costs in connection with the enforcement of the mortgage to those which have been “reasonably incurred” by it.  The plaintiff did not dispute this.  In my view this means that both the nature of the work which was done, and the amount paid by the plaintiff for such work, were reasonable in the circumstances of the case.[2]  In assessing such reasonableness it is necessary for the Court to strike a fair and just balance between what is appropriate for the plaintiff to protect and enforce its legal rights under the mortgage and the defendant not being required to pay anything in excess of this.

   7      As the reasonableness of the enforcement expenses was challenged by the defendants, there was an evidentiary onus on the plaintiff to show on the balance of probabilities that $755.66 was an amount reasonably incurred by it for such expenses.

   [2]    Citibank Savings Ltd v Pirrotta Full Court, 1 April 1998, Jud No 56603.

2. At [12] of my earlier reasons I stated:

   12  In this Court the starting point for assessing the reasonableness of legal costs is the application of Schedule 2 to the Supreme Court Civil Rules 2006 to the work which was properly done.[3] It is in essence a work-based, and not a time‑based, scale. The reasonableness of costs under that Scale is not to be assessed by taking the time occupied in performing all of the work done and charging that at the rates in items 7-9 of Schedule 2.[4]

   In referring in that paragraph to Schedule 2 I was speaking hypothetically about the current level of reasonable costs.  I did not intend to say that the costs for work done before Schedule 2 commenced on 1 October 2011 should be assessed under Schedule 2.  Such costs are to be assessed on the Court scale applicable at the time the work was done.

   [3]    Note A to that Schedule allows for the amounts to reduced or increased depending upon the circumstances of the case.

   [4]    McNamara Business & Property Law v Kasmeridis (2007) 97 SASR 129.

3. In my earlier reasons I concluded that the plaintiff had not given me enough information and documents to enable me to assess the reasonableness of the costs claimed in the enforcement expenses.  On 2 July 2012 the plaintiff filed a Fourth Affidavit of Lucy Pye (FDN17) giving further information about the work done and exhibiting relevant documents.

4. It was common ground that both s 55A of the Law of Property Act 1936 (“s 55A”) and s 88 of the NCC (“s 88”) applied in this case. Each by their terms prevents the plaintiff from seeking possession of the property until a notice complying with its provisions had been served on the defendants. It was not suggested that there was any inconsistency between the requirements of s 55A and s 88. Subject to any dispensation which might be granted, the plaintiff is precluded from exercising its right to possession of the defendants’ property unless it has complied with both s 55A and s 88. Here it is sufficient for me to deal with compliance with s 55A, but much of what I say would also be applicable to compliance with s 88.

5. Section 55A(1) provides:

   55A.  (1)     … a right to enter into possession of mortgaged land … shall not be enforceable by the mortgagee under a mortgage to which this section applies against the mortgagor by action or otherwise unless—

   (a)     the mortgagee has served upon the mortgagor a notice in writing—

   (i)alleging a breach of a covenant or condition of the mortgage by the mortgagor;  and

   (ii)if the breach is capable of remedy, requiring the mortgagor within one month after service of the notice, … to remedy the breach; and

   (iii)if the mortgagee seeks compensation for the breach, requiring the mortgagor within one month after service of the notice … to pay to the mortgagee the amount of the cost and expenses, stipulated in the notice, that the mortgagee has reasonably incurred in consequence of the breach; and

   (b)     where requirements are made of the mortgagor in the notice, he has failed to comply with those requirements.

6. Section 55A(1)(a)(iii) allows a plaintiff to include in the notice a requirement to pay “the amount of the cost and expenses, stipulated in the notice, that the mortgagee has reasonably incurred in consequence of the breach”. “Reasonably incurred” here means costs reasonably incurred taking into account the interests of the persons ultimately liable to pay the costs.[5]  The phrase “costs reasonably incurred” is the same as that in s 107 of the NCC.[6]  Although clauses 1.1 and 8.2 of the mortgage terms required the defendants to pay the plaintiff’s “legal costs on a full indemnity basis”, it was not contended that the plaintiff could include in the default notice other than its reasonable costs. 

   [5]    Bayford v St George Bank Ltd (No 2), Besanko J, 5 August 2003, [2003] SASC 242, especially at [16].

   [6]    Quoted in [5] of the earlier Reasons as set out above.

7. What are reasonable costs are to be assessed against the particular facts of the case.  What is reasonable in one case may not be reasonable in another case.  Here I assess reasonableness on the facts as disclosed in the affidavit evidence.  None of that evidence was disputed. 

8. In the copies of some of the documents from the plaintiffs’ solicitor’s file, which were exhibited to an affidavit, some small parts of the contents had been blacked out on the ground that legal professional privilege was claimed by the plaintiff for that material.  That claim was not challenged by the defendants.  I act on the evidence which I have and do not draw any adverse inference against the plaintiff from having claimed such privilege.  No indication was given of the nature of the material for which privilege was claimed and it may, or may not, have been relevant to what I have to decide.

9. The primary ground of dispute was whether it was reasonable for the plaintiff’s solicitors to have done much of the work for which enforcement expenses were claimed in the default notice and whether such work was either unnecessary or premature.  Before going through the individual items of work, I address these issues generally.

10. The defendants’ counsel did not take any point about the contents of the default notice not complying with s 55A(1)(a). However, it does not explicitly identify the breach relied upon, as is required by sub-s (a)(i).[7]   Nevertheless, it was common ground in the course of the submissions that the amount claimed as the overdue amount in the default notice of $11,267.16 was arrears of payments of principal and/or interest.  There was no suggestion that the defendants’ breach for the purposes of sub-s (a)(iii) was other than default in those instalment payments.  The requirement in the default notice for the defendants to pay the enforcement expenses of $755.66 must be as compensation under sub-s (a)(iii).  Hence, those costs and expenses must have resulted from this breach, ie. non‑payment of instalments.  As I will state later, some of the work was not so related.  (Ground A)

    [7]    Adelaide Bank Ltd v Biggs, Debelle J, 5 April 1995, Judgment No S5024.

11. Section 55A is a piece of consumer protection legislation which will be beneficially construed in favour of mortgagors to whom it applies and its function is to give them a last chance to avoid what would usually be the draconian and expensive consequence of default of being evicted from their homes.[8] Section 55A(1) makes compliance with its sub-s (a) and (b) a pre‑condition for a mortgagee exercising its right to enter into possession of the mortgaged land.[9] If the mortgagor satisfies sub-s (1)(b), the mortgagee then has no legal right to realise the security granted by the mortgage and the mortgagor can continue in possession as if there had been no breach. In my view, it is implicit in s 55A (1) that if mortgagors satisfy the requirements of the notice, they are not to be liable for the consequences of their breach, except as is allowed in sub‑s (1)(a)(iii). Therefore, mortgagees are precluded by s 55A (1) from recovering any enforcement expenses incurred by them before the expiration of the default notice for work only done in anticipation that the mortgagors might not comply with the notice. This is irrespective of any issue of reasonableness. It is barred by s 55A (1). (Ground B)

    [8]    Storr v Stoilov, Lunn M, 6 December 2007, [2007] SASC 426 at [14].

    [9]    St George Bank Ltd v McCormack, Lunn M, 21 January 2008, [2008] SASC 8.

12. The plaintiff contended that it was reasonable for its enforcement costs for the default notice to include a review of the defendants’ account with the plaintiff and the validity of the mortgage it held and to receive general legal advice on whether it should issue a default notice in the circumstances.  This is to be assessed here against a background of the plaintiff having continued dealings with the defendants, the defendants’ whereabouts being known to the plaintiff and the plaintiff knowing that the first defendant had been unemployed for some time and was engaged in major protracted litigation with a disability insurer which, if and when successful, would give the defendants the means to bring their account with the plaintiff into credit.  There was nothing in the instructions given by the plaintiff to their solicitors to suggest that there was anything untoward or sinister about the matter.  There was nothing to suggest that ordinary professional competence had not been observed in the plaintiff taking the mortgage from the defendants and in its preparation, execution or registration.  In such circumstances I do not consider it was reasonable for the plaintiff to incur legal costs in obtaining general advice about the validity of its security and whether the default notice should be served.  Whether such a default notice was served was essentially a commercial decision for the plaintiff, which was very experienced in such matters.  Nothing has been put forward as to why the plaintiff could not reasonably have made its decision to instruct the solicitors to prepare and serve the default notice without legal advice.  Much of the work that was done, and charged for in the enforcement expenses in the default notice, would have been appropriate and reasonable after the default notice had not been complied with and when the plaintiff was considering the next step of whether to institute this action.  It was not reasonable to do that work prematurely before the default notice was issued.  (Ground C)

13. Any bankruptcy of the defendants was not relevant to the preparation and service of the default notice. Under s 55A (and s 88) the notice only had to be given to the mortgagor and not to any trustees in bankruptcy. There is no reason to believe that anything different would have occurred in the preparation or service of the default notice if it had been ascertained that the defendants were bankrupt.[10]  (Ground D)

    [10]   They were not bankrupt.

14. Part of the initial instructions from the plaintiff to its solicitors was to order a kerbside valuation of the defendants’ property.  Again, a valuation had no relevance to the contents or the service of the default notice.  In any event, the valuation was not obtained until after the default notice had been served.  There is no good reason why the plaintiff should have instructed its solicitors to obtain such a valuation.  A large financial institution such as the plaintiff should be more than capable itself of arranging any valuation.  I note that the instructions to the valuer from the plaintiff’s solicitors were that the valuation was to be sent direct to the plaintiff and not to the solicitors.  (Ground E)

15. As all of the allowable legal work for the default notice was done in late June 2011, the proper costs scale on which to base the reasonableness of the costs is Schedule 1, plus 12.6 per cent.[11]  My assessment of the reasonable legal costs for the enforcement expenses in the default notice is set out in the following table:[12]

    [11]   The second Schedule only operated for work done on and after 1 July 2011.

    [12]   The item numbers and descriptions are taken from the defendants’ Supplementary Submissions for the hearing on 17 July 2012.  The items of work are described in greater detail in the Fourth Affidavit of Lucy Pye (FDN17).  IMAS and CAPS are computer systems of the plaintiff to which its solicitors had access.

Item No.	Items of Work	Relevant Ground	Additional Comment	Amount Allowed Inc. 12.6%
1	Peruse initial instructions	This was an important document which contained almost all the information necessary for the default notice, except the mortgage number.	$   7.00
2	Attending to extract account information	It was not reasonable for the solicitors to check the plaintiff’s accounting records. The amount shown in the default notice for the arrears and the payout figure were those contained in the plaintiff’s initial instructions.  It could reasonably be expected that what was stated by the plaintiff was correct and there was no need for solicitors to check it.	0
3	Drafting initial review	A, B, C	As for 2.	0
4	Examining ANZ’s original file	A, B, C	As for 2 and 3.	0
5	Examining mortgage	Some work was necessary to obtain the registered number of the mortgage and it was reasonable to check some provisions of it. Allow clerk’s telephone attendance and one page perusal.	$ 22.40
6	Examining loan agreement	No dispute.	$   5.00
7	Drafting initial review	A, B, C	0
8	Examining printout from CAP system	C	As for Item 2.	0
9	Examining appraisal report of property	E	0
10	Email requesting CT etc search	Internal communication within plaintiff’s solicitors	0
11	Obtaining CT etc search	Clerk’s attendance	14
12	Email to ANZ requesting security packet	A, B, C	Not reasonable to examine original documents.	0
13	Email requesting bankruptcy searches	D	0
14	Obtaining bankruptcy searches	D	0
15	Letter to Mr Pollard enclosing notice of default	$ 18.50
16	Letter to Mrs Pollard	Circular letter only.	$   9.35
17	Letter to process server	Quarter page letter.	$ 16.50
18	Notice of default	Allowed only as the equivalent of the fee for one full page. Many of the items were standard clauses which appear in most such notices.	$ 73.00
19	Attendance to settle	No justification for more than one lawyer to be involved in the preparation of the default notice.	0
20	Updating IAMS with process server report	$ 20.00
21	Letter to Propell Valuers	E	0
22	Reading email from Propell	E	0
23	Updating IAMS log re valuation	C	0
24	Read email from Pollard	This communication was received after the default notice was signed and did not relate directly to it.	0
25	Updating IMAS log	C	0
TOTAL	$ 185.75

1. The service fee for the default notice on the basis indicated in my earlier reasons was $77.00 inclusive of GST, plus 12 kilometres at 77 cents per kilometre, totalling $86.24.

   GST

2. In my earlier reasons I said on this topic:

   19    In the $755.66 there is a component of $66.26 for GST.  It was not suggested that such GST was not properly chargeable by Fisher Jeffries on its accounts to the plaintiff.  However, it appears that the plaintiff has not debited the whole of this GST to the defendants’ account.  In paragraph 7.3 of her second affidavit Ms Pye deposed:

   I note that the Plaintiff’s practice is to debit a borrower’s account with only 25% of the GST in the invoice which accounts for the difference between the total of each invoice and the amount debited.

   20    The defendants contended the enforcement expenses should contain no more of a GST component than the plaintiff had debited to their account.  It is unclear to me why the plaintiff has not sought to recover the whole of the GST from the defendants.  I do not know whether it is because the plaintiff does not regard the defendants as being liable for that GST or whether it is some gratuitous act by the plaintiff.  Again, if the evidence is to be re-opened, this is a topic which can be addressed.

1. The plaintiff did not adduce any further evidence on the topic.  Its counsel merely referred me to some relevant provisions in the National Consumer Credit Protection Act 2009, the A New Tax System (Goods and Services Tax) Act 1999 and the Regulations under that Act.  They showed that in what the credit provider is entitled to recover from the borrower for the GST paid by the credit provider there could be in some circumstances a reduction of the input tax credit for GST of 75 per cent.  The plaintiff had paid all of the GST which was charged by its solicitors on the enforcement costs.  Its counsel argued that if it subsequently chose to only debit one quarter of that GST to the debtors’ account, that was a gratuity for the mortgagors, but they had no legal right to it.  It was suggested that at the time the default notice was prepared, it had to be assumed that the plaintiff would seek to recover all of the GST which it would pay to its solicitors.  However, this is contrary to the evidence which the plaintiff’s solicitor, Ms Pye, deposed in her second affidavit:

   7.3… I note that the Plaintiff’s practice is to debit a borrower’s account with only 25 per cent of the GST in an invoice which accounts for the difference between the total of each invoice and the amount debited.

   The plaintiff has chosen not to give evidence about this practice. I infer that it is the normal situation in matters of this type. Therefore, at the time the default notice was signed, there was no reasonable expectation that the defendants would be called upon to pay more than one quarter of the GST to the plaintiff. If the defendants had complied with the default notice, they would have paid an amount for GST to the plaintiff, which the plaintiff would not otherwise have sought to recover from them. Compensation for the purposes of s 55A(1)(a)(iii) can only be for what is properly chargeable to the mortgagor. Accordingly, the enforcement expenses should not have included more than 25 per cent of the GST. Only $6.39 should be allowed for GST, being 25 per cent of $25.77.

2. For these reasons, I find that the reasonable enforcement expenses (including allowable GST) were no more than $278.38,[13] and hence the amount claimed in the default notice was excessive by $477.28.

   [13]   Ie. $185.75 plus $86.24 plus $6.39.

3. As previously indicated, I will now hear any application by the plaintiff for dispensation under s 55A(2)(a) and s 88(5)(c) of the NCC.