Guss v Geelong Building Society (in liq)

SUPREME COURT OF VICTORIA
COMMON LAW DIVISION	Not Restricted

No. 7961 of 1998

SANDRA McINNES GUSS	Plaintiff
v
GEELONG BUILDING SOCIETY (In Liq)	Defendant

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JUDGE:	Ashley J
WHERE HELD:	Melbourne
DATES OF HEARING:	2, 5, 6, 7, 8, 9, 12, 14, 15 February 2001
DATE OF JUDGMENT:	20 February 2001
CASE MAY BE CITED AS:	Guss v Geelong Building Society (in liq)
MEDIUM NEUTRAL CITATION:	[2001] VSC 37

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Mortgage – sale by mortgagee – whether property held by mortgagors as trustees – whether mortgage given in breach of trust – duty of mortgagee – no breach.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P.J. Hayes	Joseph Guss
For the Defendant	Mr C.J. Delany	Minter Ellison

HIS HONOUR:

The Proceeding

By this proceeding Sandra Guss sues Geelong Building Society (in liquidation) for damages. She claims that in selling a Portsea clifftop property named "Bischoff" on 5 February 1995 as mortgagee the defendant breached a duty which it owed to she and her husband, then registered proprietors and mortgagors of the property. The existence and content of that duty, she asserts, is imposed by s. 77(1) of the Transfer of Land Act 1958 (the Act). She claims that in consequence of the breach the property was sold for $1.65 million, whereas it should have been sold for an amount between $2 million and $2.5 million. She claims damages ‑ in effect the difference between the amount that she says should have been realised and the amount that was realised. Really as an alternative, she claims damages representing the difference between the price achieved and an amount up to 20 per cent greater than such price. It is unnecessary to presently elaborate upon the bases for the varying quantification of the claim, or to comment upon their soundness conceptually, as to the latter of which see Jenkins v National Australia Bank Ltd[1].
[1][1999] VSCA 33 at para 22.

Mrs Guss alleges that she brings this proceeding as a trustee of trusts of which she and her husband were trustees, of which the three children of the marriage were beneficiaries, and in respect of which the Portsea property was trust property.

Mr Joseph Guss was, but is not now, a plaintiff in the proceeding. Neither is his trustee in bankruptcy a party (Mr Guss presently being the subject of a sequestration order in connection with which the defendant was, as I understand it, the substituted petitioning creditor)[2].
[2]The bankruptcy proceedings were a consequence of the sale of the property yielding a sum which did not enable the defendant to recoup the amount which was due to it together with the costs of various proceedings in which it obtained costs orders in its favour. The amount of the shortfall, the evidence showed, was in all something around $180,000.

The defendant denies that the property was trust property. If that be wrong, it alleges that the mortgage of the property was in breach of trust and that the plaintiff is entitled to bring this proceeding only to the extent of her interest as tenant in common in equal shares. It says further that there was no breach of its duty as mortgagee; but that if there was then in any event no loss was occasioned to the plaintiff thereby.

Was the Property held as Trust Property after October 1975?

By terms contract of sale dated 18 April 1967 E.G. & H. Nominees Pty Ltd (EG&H) purchased the property. The purchaser was a nominee company operated by the solicitors' firm in which Mr Guss was then a partner.

On 5 May 1967, EG&H declared that it held the property on trust for Mr and Mr Guss's three infant children as tenants in common in equal shares. By the declaration of trust EG&H undertook to transfer the land into the children's names if they so directed.

On 28 March 1969 three deeds of settlement were executed by which Mr Guss as settlor appointed EG&H the trustee of trusts in favour of each of his three children. The land was not then made a part of the fund of the respective trusts. There was provision in each deed for additions to the fund thereof.

The terms contract was completed some time in 1970. EG&H took a transfer. It was registered on 17 November 1970.

By transfer dated 22 October 1974, EG&H transferred title in the land to the three children as tenants in common in equal shares. The transfer was expressed to be "in consideration of their" (i.e. the children) "being entitled in equity". The transfer was duty free.

On 21 February 1975 three deeds were executed by each of which Mr Guss as settlor of the 1969 trusts removed EG&H as trustee and appointed himself and his wife Sandra Guss as trustees.

By deed dated 23 October 1975 the Guss children, as registered proprietors of the land, and being

"desirous of transferring their respective interests in the said land respectively to the" (1969) "Settlements so that the same shall be held thereunder and forming part of the fund constituted by each Settlement by the Trustees"

transferred thereby
"each of their respective interests in the said land to the Trustees to be held by the Trustees under and pursuant to the provisions of each said Deed of Settlement."

The parties to the deed ‑ Mr and Mrs Guss and the three children ‑ agreed to execute a transfer of the land in favour of the trustees.

A transfer was executed. Dated 23 October 1975 it transferred the land to Mr and Mrs Guss as tenants in common in equal shares. The transfer, on which stamp duty was not charged, was registered on 15 March 1976.

Mr and Mrs Guss continued to be the registered proprietors of the property until it was sold on the instructions of the liquidator of the defendant on 5 February 1995. The sale was a mortgagee sale, Mr and Mrs Guss having defaulted on a mortgage entered into between the defendant and themselves on 29 October 1986. The mortgage was given

"in consideration of the advance specified lent or agreed to be lent by the mortgagee to the debtor".

The debtor was identified as Tropitone Furniture Co Pty Ltd (Tropitone). The amount of the advance was $740,000.

There is possible significance to the fact that Mr Guss is not a plaintiff. So, Mrs Guss alleges that the land was subject to trusts in favour of her children. The defendant conceded that, if such was the case, then she is able to recover, if she succeeds, the entirety of what I may call the shortfall. She may do so notwithstanding that she and her husband held the property as tenants in common in equal shares. But, says the defendant, in fact the property was not held on trust. If the plaintiff can recover, it is only in respect of the damages referable to her interest as a tenant in common in equal share. Further, contends the defendant, even if the property was held on trust the plaintiff has so formulated her claim that she can recover, if at all, only damages referable to her interest.

The defendant's contention that the land was not held on trust depends on two matters, the second of which was ultimately not pressed. First, the fact that, by the 1975 transfer, the transfer was expressed to be "in consideration of "(Mr and Mrs Guss)" being entitled in equity". Second, the fact that the property was transferred to Mr and Mrs Guss as tenants in common in equal shares, rather than to them jointly.

I should deal with this aspect of the proceeding immediately. I do not accept the defendant's contention. As at October 1975 the children held legal and equitable interests in the land. The 1967 declaration of trust had run its race. The 1969 settlements were extant, but the land was not trust property. Why title to the land had been transferred to the children in 1974 is unknown. But it does not alter the fact that transfer there was. The February 1975 substitution of Mr and Mrs Guss as trustees of the 1969 settlements in lieu of EG&H may be seen as the precursor of the October 1975 transactions. But again, what of it? Then, focusing on the deed of 23 October 1975, its intent and what it purported to do is crystal clear: vest title in the land to Mr and Mrs Guss so that it could be held by them as trustees under the 1969 settlements.

It is in the context described that the 1975 transfer must be understood. It might be accounted odd that the transfer was to Mr and Mrs Guss as tenants in common. Mr Guss could not explain it, although the transfer bears his (and his secretary's) initials. Nonetheless, it was ultimately not said for the defendant that this anomaly meant that the land was not held on trust for the children.

Then, as to the reference to Mr and Mrs Guss "being entitled in equity", Mr Guss gave some evidence. He claimed that they did have "an equity" as at October 1975. It was resulted from the existence of the 1969 settlements and the deed executed on 23 October 1975. It was "an equity" constituted by the right of he and his wife to take title to the land transferred to them so that it might then be held on trust by them for the children.

Save for that explanation there is nothing which would suggest that as at October 1975 Mr and Mrs Guss had an equitable interest in the land ‑ to which, by the transfer, the legal interest was being added. In fact, the evidence is that the children held the legal and equitable interest in the land as at October 1975, and ‑ bearing in mind the deed dated 23 October ‑ that they intended to dispose of the former so that the property could become trust property under the 1969 settlements. That being so, I am not at all persuaded that the true situation was altered by the form of the transfer. Adoption of that form, though it does not bear upon that conclusion, seems likely to have reflected Titles Office procedures and the understandable desire of Mr and Mrs Guss to avoid imposition of stamp duty[3].
[3]See the evidence of Mr Guss at T.205‑207.

I should refer to three further arguments raised by the defendant concerning the question whether Mr and Mrs Guss held the land on trust. First, a suggestion was raised by the defendant's counsel in cross‑examination of Mr Guss to the effect that the transfer was not a working out of clause 3 of the deed of 23 October 1975 because the deed called for a transfer that the land be held on trust and that is not what the transfer did. I do not accept that submission. What I have said already is pertinent.

Second, a submission was advanced in the closing address of counsel for the defendant that it was apparent that there was no transfer to Mr and Mrs Guss as trustees because immediately after transfer they pledged the property as security for their personal obligations or business accommodations. If the property was so pledged ‑ and that is a matter to which I will in a few moments direct attention ‑ in my opinion it would not gainsay that they held the property as trustees.

The last‑mentioned submission leads on to another issue. The property was repeatedly mortgaged and charged between late 1975 and 1986 ‑ some 12 times in all. The last mortgage was that given to the defendant to secure the loan to Tropitone. According to an argument raised by the defendant the Tropitone mortgage ‑ and, indeed, all the other mortgages, but the other mortgages do not matter ‑ were given in breach of trust because they were given to secure the personal obligations or business accommodations of Mr and/or Mrs Guss and were remote from the purpose of the trusts.

Before turning to that issue I should refer to third of the arguments raised by the defendant concerning the question now under consideration. Counsel submitted that a sale of land or other property by a minor is not binding unless it is ratified[4]. By analogy he sought to extend that principle to a transfer of property by minors to trustees. He submitted that there was no evidence of any ratification. In the event, he contended, "there was no valid transfer of (the children's legal) interest in the land". But later he submitted that the position was that before ratification Mr and Mrs Guss held as registered proprietors but not as trustees. He did not seek to deny that as registered proprietor Mrs Guss was able to bring the present proceeding ‑ although if she did not hold as trustee, then only in connection with her interest as a tenant in common.
[4]Counsel referred obliquely to Hall v Loder (1885) 7 LR (NSW) 44 at 49, Rubinovitch v Emmett (1901) 27 VLR 265, Edwards v Carter [1893] AC 360; and specifically to Hearle v Greenbank (1749) 3 Atk 695 at 712, and Percy v Youngman [1941] VLR 275.

I do not accept the argument. It is the fact that the Guss children were minors in 1975. One of the children, indeed, was then only ten years old, and his signature is that which might be expected of a child of that age. It may next be readily accepted that the children had either no or little idea of what they were signing when they executed the deed and the transfer. But even if the principle to which counsel for the defendant referred could be extended to the present situation it does not follow that, before ratification, the parents held as registered proprietors but not as trustees.

Further, the land was held by Mr and Mrs Guss until 1995. By that time all the children were adults. I think it is arguable, though the matter was not much debated, that there may have been ratification by conduct. In that connection the course taken by the two older children when proceedings were brought against them by the defendant could possibly have been relevant.

Finally I should mention the circumstance that on registration of the Tropitone mortgage the defendant acquired an interest in the land. The significance, if any, of that circumstance upon the issue to which I have been referring was not debated. I refrain from saying anything about its possible significance.

Was the Tropitone Mortgage Transaction in Breach of Trust?

According to the defendant's submission the mortgage was given "in breach of trust... outside the terms of the trust and for a different purpose". The consequence was said to be that Mrs Guss could as mortgagor bring the present proceeding, but only in respect of her interest as tenant in common in equal shares.

The mortgage, counsel for the defendant submitted, was given in breach of trust because on the evidence it was given to secure the personal borrowings or business requirements of Mr and/or Mrs Guss. Those borrowings or requirements, counsel submitted, were of no benefit to the beneficiaries via the trusts, and the trustees by their conduct thus breached their duty "not to put themselves in a position of conflict of interest and conflict of duty". The situation was not dissimilar, counsel submitted, to self‑dealing constituted by trustees purchasing trust property[5].
[5]As to which see, very recently, the observations in Clay v Clay & Ors [2001] HCA 9 at paragraphs 51‑54.

The significance that the defendant sought to attach to the conduct in alleged breach of trust was this: central to the plaintiff's claim, counsel submitted, was the allegation that this was a trustee transaction ‑ see paragraphs 3, 9, 10 and 11 of the Further Amended Statement of Claim (the Statement of Claim). By paragraph 11 the plaintiff alleged that she had suffered loss and damage "in her capacity as continuing trustee of the trusts". She had not suffered loss in that capacity. She must fail in her claim.

Counsel did not contend that, if a trustee suffers a loss of trust property which had been dealt with in breach of trust, the trustee is disabled from recovering that loss against a party responsible for the loss. So he did not contend that the plaintiff could not have sued as mortgagor notwithstanding that the mortgage had been allegedly given in breach of trust. His point was limited to the form of the Statement of Claim (in particular paragraph 11) in the circumstance that (as he contended) the mortgage had been given in breach of trust.

The purposes for which the property was repeatedly mortgaged between 1975 and 1986 (including the purposes for which the Tropitone mortgage was given) were described by Mr and Mrs Guss. Having regard to the terms of the 1969 deeds of settlement it is, I think, well arguable that the Tropitone mortgage was given in breach of the trusts thereby constituted. It was, I think, the last episode in a long course of conduct in which the property was pledged to the true advantage of Mr Guss, companies with which he was associated, and possibly Mrs Guss. It is difficult to see that such transactions were authorised by the 1969 deeds of settlement.

Counsel for the plaintiff attempted to persuade me that the transactions benefited the children, so as to fall within transactions authorised by the deeds of settlement, because ultimately they worked to provide the income necessary for the children's support. That was also the purport of the evidence Mr and Mrs Guss. I very much doubt that this approach answered the attack made by defendant's counsel on the character of the transactions.

Counsel for the plaintiff also sought to draw comfort from the fact that one of the Guss children was a shareholder in and director of Tropitone; and from evidence that a second child was employed in the business conducted by Tropitone. I have little doubt, in light of the past dealings with the trust property, that these circumstances were mere coincidence. Be that as may, I doubt that such circumstances rendered the Tropitone mortgage an exercise of trust powers ‑ save possibly in the case of the child who was shareholder and director.

Before parting from this aspect of the issue now under consideration I should say that the pertinent evidence of Mr Guss[6] was most unsatisfactory. It was characterised by prevarication, by what I consider was deliberate obtuseness, and as well by advocacy.
[6]See particularly T.216‑221.

The evidence given by Mr Guss was otherwise unsatisfactory. An example was his evidence concerning his belief that the residence on the property did not encroach on to the eastern lot (the property was on two titles). I formed the opinion, I regret to say, that Mr Guss's evidence generally should be closely examined; and that where it conflicted with the evidence of another witness the evidence of the other witness, except if there was some obvious reason why it should not be accepted, should be preferred.

I return to what may be called the pleading issue. It is clear enough that the form of paragraph 11 of the Statement of Claim was directed to an issue of quantification. Plaintiff's counsel accepted that the duty owed to his client was owed to her as mortgagor, and that it was as mortgagor that she had a right to damages in the event of breach. The allegation that loss and damage had been suffered by her in her capacity as trustee was made to emphasise her assertion that, because she in fact held the property as a trustee, she could claim for the entirety of the loss and not merely for the loss referable to her interest as tenant in common. Counsel for the defendant conceded that as trustee she could pursue the larger claim.

I consider, in the circumstances described, upon an assumption the Tropitone mortgage was given in breach of trust, that the form of the Statement of Claim, and in particular paragraph 11, should not be held to stand in the way of recovery of damages by the plaintiff as a trustee.

The Duty owed by the Defendant to the Plaintiff

As I have already noted, the plaintiff pleads that the defendant owed she and her husband a duty which was imposed by s. 77(1) of the Act. She alleges that the duty was owed to she and her husband as mortgagors and trustees, they having acted in their capacity as trustees in entering into the mortgage.

According to the plaintiff's case the nature and extent of the duty is that set out by Murphy J in Goldcel Nominees Pty Ltd (Provisional Liquidator Appointed) v Network Finance Ltd & Anor[7]. Breach should be determined by reference to the duty thus understood.
[7][1983] 2 VR 257, particularly at 261 line 9 to 262 line 13.

The defendant accepts that it owed the plaintiff a duty of care. It says that it owed her that duty as mortgagee to mortgagor and not otherwise. Counsel for the defendant submitted that the formulation of the duty by Murphy J in Goldcel "put it a bit high". He referred me to the position at common law as described in the judgments in Pendlebury v The Colonial Mutual Life Assurance Society Limited[8]. He referred me also to the judgment of Lush J in Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd[9], which, he contended, framed the mortgagee's duty somewhat more narrowly than the judgment of Murphy, J. in Goldcel. At the heart of his submission was the proposition that in formulating the nature of a mortgagee's duty to have regard to the interests of a mortgagor, Murphy, J. went too close to describing a common law duty of care ‑ that is, by his reference to "the objective standard of reasonableness of conduct"[10] ‑ notwithstanding that his Honour specifically left open the question whether the relevant portion of s. 77(1) may be breached "if negligence in carrying out the sale is established"[11].
[8](1912) 13 CLR 676, counsel particularly referring to the judgment of Isaacs J at 701‑701.
[9][1976] VR 309.
[10]At 262 lines 9‑13.
[11]See at 263 lines 7‑18.

In my opinion, counsel for the defendant was correct in submitting that his client as mortgagee owed a duty of care to the plaintiff as mortgagor and not otherwise. Indeed, in his final address counsel for the plaintiff eschewed the suggestion that the defendant owed the plaintiff a duty in any other capacity.

It follows from the concession rightly made by plaintiff's counsel that paragraphs 9, 10 and 11 of the Statement of Claim do not really expose the plaintiff's claim clearly. The true claim was revealed to be this: that the defendant owed the plaintiff (and her husband, insofar as it could matter) a duty as mortgagee to mortgagors. It breached that duty, causing loss and damage to the plaintiff. The loss and damage suffered by the plaintiff as a mortgagor was the entirety of the loss suffered by the sale of the property at an under‑value, because this was a transaction entered into by the plaintiff as trustee, the property mortgaged being trust property.

Just why the claim was pleaded as it was remained, at trial's end, unexplained. The likely explanation is that it reflected a desire by Mr Guss ‑ who, as I said earlier, was originally a plaintiff in the proceeding and who is now a bankrupt ‑ that if the claim succeeded no part of the proceeds should form part of his bankrupt estate. But whether that be the explanation or not need not be determined.

I turn to the content of the duty of care. The plaintiff brings her case only under s. 77(1) of the Act, so it is unnecessary to consider whether the common law duty owed by a mortgagee retains any life in Victoria; and, if so, whether it differs from the duty set out in the section[12].
[12]Query whether, in light of the judgments of Lush, J. in Henry Roach at 313, and of Murphy, J. in Goldcel at 261, it would now be open to contend that there is in Victoria a duty other than the statutory duty.

At common law there was a question whether the requirement that a mortgagee act in good faith encompassed a requirement that a mortgagee not confine his attention to his own interests.[13] Not confining attention to one's own interests implies having regard to the interests of another ‑ most obviously, a mortgagor.
[13]See for example Pendlebury per Griffith CJ at 680, Barton J at 694 and Isaacs J particularly at 702; see also per Menzies J, dissenting, in Forsyth v Blundell (1973) 129 CLR 477 at 481.

What is now clear is that by statute the obligation to have regard to the interests of the mortgagor (and others) is imposed separately and cumulatively upon the obligation to act in good faith. Each allegation must be given content. That leaves untouched the questions whether the obligation to act in good faith and the obligation to have regard to the interests of the mortgagor have, subject to any impact of the statutory division of the two conceptions, their common law meanings; and what those meanings were.

I think that both Henry Roach and Goldcel answered the first of the questions I have just posed "yes"; and that each, but with a somewhat different outcome, gave content to the common law meanings of the obligations so far as was necessary to resolve the instant cases.

I should think there is no doubt that good faith at least "import(s) a subjective element of honesty, fairness and lack of fraud or collusion", as Murphy J put it in Goldcel[14]. Both counsel, in their final addresses, agreed that this was so.
[14]At 261.

Then, as to a mortgagee being required to "hav(e) regard to the interests of the mortgagor", it seems to me that the obligation described by Murphy J in Goldcel[15] was somewhat more substantial than the obligation described by Lush, J. in Henry Roach[16]. Certainly Fullagar, J. appears to have considered that there was a difference in substance and not merely in form: see Gattuso v Geelong Building Society & Ors[17].
[15]At 261.
[16]At 313.
[17](1989) Australian Torts Reports 69,281 at 69,283.

The difference lies, I think, in this: in Henry Roach Lush J found in the concept of a mortgagee having regard to the interests of a mortgagor an echo of the common law duty to take reasonable precautions to obtain a proper price ‑ which was sometimes expressed as part of the duty to act in good faith. The duty to take reasonable precautions to obtain a proper price was not equivalent to a common law duty of care. It recognised the primacy of the interests of the mortgagee. It recognised, at least in general, that a mortgagee may sell when he chooses. On the other hand, it recognised that a mortgagee must adequately advertise a sale, must take reasonable steps to ascertain value before selling, and must not take any amount simply because it will see him paid out.

In Goldcel, however, Murphy J considered that a mortgagee is required to take reasonable steps to ensure that, at time of sale, he is getting the best price then available ‑ compliance with or breach of this obligation being determined objectively. This went beyond the approach of Lush J because it introduced the concept that a mortgagee must take reasonable steps to obtain the best price in lieu of a requirement that he take reasonable precautions to obtain a proper price. Moreover, it proposed that compliance with the duty or not should be objectively assessed, rather than by considering the duty as one emanating from and shaped by the duty of a mortgagee to act in good faith. Perhaps, however, it retained some of the notion of the primacy of the interests of the mortgagee; because it seemed to imply that a mortgagee has the power to determine the sale date[18].
[18]See at 261 lines 48‑49.

Clear it is, despite the breadth of the obligation described by Murphy J, that his Honour did not equate the duty owed with a common law duty of care. He certainly did not say that a mortgagee would breach its duty to have regard to the interests of a mortgagor if it acted negligently in selling the mortgaged property.

Counsel for the plaintiff, as I have said, urged me in this case to consider duty and breach by applying the approach of Murphy J in Goldcel. It is not an approach which is precluded by authority. Each of Henry Roach and Goldcel have often been cited, sometimes considered, and at times applied. I have decided to test the plaintiff's case at the outset by applying the Goldcel approach, whilst having regard to the need to consider whether the whole of the defendant's conduct in and about the exercise of its power of sale disclosed that in all the circumstances there was a breach of duty[19]. Only if the plaintiff's case would succeed upon application of that approach would it be necessary for me to resolve the question whether the same outcome would result from application of Henry Roach; and, if not, then which of the authorities I should follow.
[19]As to which see Gattuso, supra, at 69284 per Fullagar J.

The Physical Disposition of the Land and Improvements

The Guss property was in two lots. They were situate between a foreshore reserve to the north and Point Nepean Road to the south, subject only to the fact that part of the northern boundary of the eastern lot abutted land on which the Lord Mayor's Camp was conducted. The lots measured 330 feet by 66 feet, and each of them was thus half an acre in size[20].
[20]Some evidence was given in metric units and some in imperial units. These reasons will not be confined to one or the other.

Relative to the two lots, the line of the foreshore reserve was on a rising plane, commencing at a point west of the property and continuing across its frontage away to the east.

The front portion of the eastern allotment had been excavated to an extent by some earlier owner of the property. According to the evidence of a surveyor, Mr Tyrell, the extent of the excavations seemed not to have been very great.

On the foreshore reserve in front of the eastern lot stood a large cypress tree. The reserve was at relevant times under the control of the Portsea Foreshore Trust.

There was a tennis court towards the Point Nepean Road end of the eastern lot. It was entirely constructed on that lot, but the fence on its western side and embankments to its west forming part of its surrounds extended on to the western lot.

Along the eastern side of the eastern lot there was a row of cypress trees. They had been planted by an earlier owner. They shielded the property from a view of what were said to be unsightly apartments standing on the lot immediately to the east of the Guss property. Had the eastern lot been sold separately, and had the buyer wished to retain the tennis court, the evidence indicated that it would have been necessary to remove the trees if the buyer wished to have a driveway running to a residence at the northern end of the property[21].
[21]See the evidence of Mr Anderson at T.599‑600 and the evidence of Mr Tyrell at 623.

Mr Cooksley, a very experienced town planner employed by the Mornington Peninsula Shire Council, gave pertinent evidence concerning the excavation at the northern end of the eastern lot. He said, speaking generally, that the Council would look favourably upon a properly‑researched application to restore the natural condition of land. He conceded, however, that if an application to fill in the excavated area of the eastern lot had possibly unfavourable implications for the property owner to the east, then the prospect of an expensive and protracted planning fight could not be discounted. In the event, I consider that the defendant, its agents and potential purchasers would reasonably have been cautious in making any assumption that the level of the depressed area of the eastern lot could be raised. If it could not, there were adverse implications for the views that a home erected in that area could achieve.

I turn to the Guss residence. Built before EG&H purchased the property, the residence was at February 1995 somewhat dated. Both Mr Gilder, a valuer and real estate agent called for the plaintiff, and Mr Ellis of Fitzroys, who valued the property on the defendant's instructions in late January 1995, considered that the residence added nothing to the value of the property. I accept that evidence, subject only to the rider that the site of the house might have been thought at the time to open up the possibility (though doubtfully the probability) of obtaining a permit to rebuild within its footprint ‑ a favourable prospect since set‑back distances were prescribed by the pertinent Planning Scheme which in the ordinary case would have required the residence to be erected much further back from the foreshore reserve than was in fact the case.

An important question at trial concerned the physical position of the residence on the property. It was common ground that the house was situate close to the northern boundary of the western lot, and that it was skewed so as to face west of north rather than at right angles to the side boundaries (which ran pretty well north/south). The debate was whether a part of the residence ‑ the south‑east corner ‑ encroached on to the eastern lot. The significance of the debate was this: according to the plaintiff the property should have been sold in two lots; and not to sell it that way seriously prejudiced potential return from the sale. It was in this connection that the plaintiff alleged that a sale should have realised between $2 million and $2.5 million.

The property was in fact offered for sale in one parcel, although it was advertised as being a property on two lots and was talked up by the auctioneer as possessing that feature.

It is not the fact that, if the residence encroached on to the eastern lot, the property could not have been sold in two lots. There were three ways in which, at least in theory, such a sale would then have been possible. But the threshold question was whether there was encroachment in fact.

That question was resolved to my satisfaction by the evidence of the surveyor, Mr Peter Tyrell. The firm of which he is a principal conducted a survey of the property in February 1997. A plan of survey was certified on 17 February 1997. The plan showed, inter alia, the outline of the residence and of the garage and brick building (a rumpus room) attached to or close by it. A plan of existing buildings annexed to a letter dated 19 February 1997 from the surveyor to the then owner of the property showed, as did the survey plan, the relationship between the eastern side of the residence, garage and rumpus room and the boundary between the east and west lots.

In short, the survey revealed that:

+the south‑east corner of the residence encroached on to the eastern lot by 190 millimetres, and over a very short north‑south distance;
+the eastern wall of the residence ran parallel to the boundary and the one was 50 millimetres from the other;
+the south‑east corner of the rumpus room encroached on to the eastern lot to a maximum of 520 millimetres, and over a north‑south distance of about two metres.

The position of the residence, garage and rumpus room was in February 1997 the same as it had been in the period December 1994 to February 1995.

It follows from the actual situation disclosed by the 1997 survey that if a check survey had been done in late 1994 or early 1995 (which the plaintiff contended had been necessary) then if the property was to be sold in two lots one of three things had to occur:

+ realignment of the intermediate boundary; or
+ demolition of all or part of the residence and its appurtenant buildings; or
+sale of the two lots with each of the contracts containing a demolition clause, whose effect would be that if the two lots were sold to different purchasers then the vendor would demolish the residence (including the garage and rumpus room).

It does not follow from what was ascertained on survey in February 1997 that the issue whether or not there was encroachment was uncontroversial in the period December 1994 to February 1995. There was some measure of controversy.

In circumstances where the 1997 survey established the truth of the situation without doubt, the only possible relevance of the controversy could be this: that upon examination it might be said to provide some evidence, from the plaintiff's standpoint, of a failure by the defendant and its agents ever to seriously address the issue of sale in two lots; whilst from the defendant's standpoint it might be said to reveal an improbability that Mr Guss pressed the two‑lot issue in the manner and to the extent that he claimed in his evidence ‑ this raising the question "Why not?"

I should refer, then, to the evidence of the witnesses as to what was known about encroachment in late 1994 and early 1995.

Evidence concerning that matter was given by Mr Guss, Mrs Guss, Mr Glynn, Mr Anderson, Mr Sutherland, Mr Ellis and Mr Rolfe.

Mr Guss gave evidence of stepping out the boundary between the western and eastern lots in company with Mr Warwick Anderson years before 1995. Mr Anderson was, and is, an estate agent and was his neighbour to the west. They satisfied themselves, Mr Guss said, that the residence did not encroach. That evidence was in conflict with the evidence of Mr Anderson. I prefer Mr Anderson's evidence[22]. As I have said earlier, I do not consider that Mr Guss was a reliable witness.
[22]At T.587‑88.

It is convenient here to note that counsel for the plaintiff did not in his closing address submit that Mr Anderson was either an untruthful or an unreliable witness; rather the contrary. Specifically, he did not ask me to disbelieve Mr Anderson's evidence concerning the informal measurement which was made in about 1992 or 1993.

Mrs Guss gave evidence that the boundary between the lots was ascertained when a tennis court was erected on the eastern lot. It had been thought important to ensure that the court was wholly on the eastern lot. She referred to the boundary being established by a man with a theodolite. Her evidence implied, if it did not directly assert, that the residence was then ascertained to be wholly on the western lot. The tennis court, it will be recalled, was sited at the Point Nepean Road end of the eastern lot; whilst, as I have said, the residence was erected close to the foreshore boundary and mainly on the western lot. Those matters apart, the man with a theodolite was not called to give evidence.

Mr Michael Glynn is a very experienced valuer. He was appointed by the defendant to value the property for mortgage purposes in 1986. He provided a report to the defendant dated 14 August 1986. The defendant had the report on its file. Eventually it discovered it in these proceedings.

Mr Glynn said this in his report:

"From our investigations it would appear that the main dwelling is constructed within the boundaries of one title. The only improvements on the other title are the tennis court and the garage. It would therefore be reasonable to assume that the land could be sold in two separate titles each 0.5 acre in area."

He gave evidence that despite this being just one of hundreds of properties that he had valued over the years he recalled what he had done to yield his conclusion that it appeared that the residence was within the boundaries of one title. He had used his 30 metre steel tape measure to determine the boundary between the lots, working from the side boundaries.

I accept Mr Glynn's explanation why he recalled the particular property. I accept that he determined the boundary between the lots in the way he described. His methodology, however, as with measurements made by others, contained room for error.

Mr Glynn gave evidence that his use of the phrases "it would appear" and "reasonable to assume" reflected the fact that he reported his findings as a valuer, not as a surveyor. They were not intended to indicate uncertainty. I accept this evidence. It sensibly explains the caution in the language which he used.

There was, as Mr Glynn said, good reason for him determining whether the residence was contained within one title. It was a potential advantage to a mortgagee, in the event of default, that lots could be sold separately.

The selling agents in conjunction were G.D. Sutherland Real Estate Pty Ltd and R.T. Edgar Pty Ltd. In a marketing submission dated 13 December 1994 those agents said this:

"A lack of boundary fencing in part prohibited an accurate check of title dimensions and we have assumed that the land occupies the correct title location".

They also reported that:
"Erected on the northern section of the site and in part straddling the central title boundary is a ... residence".

In summarising sales disadvantages they referred to ‑
"the encroachment of the residence over the common title boundary".

Mr Warwick Anderson, to whom I referred a few moments ago, was the representative of Edgar who had charge of the sale for that company. The evidence leaves me in no doubt that, of the agents who participated in the sale of the property, he had the greatest experience with respect to Portsea property sales. The Guss interests, I should add, had insisted that it be a term of the settlement of litigation which led on to the sale of the property that Edgar be appointed "to the marketing team". Plainly it was intended by the Guss interests that Mr Anderson be the representative of Edgar who carried the matter.

Mr Anderson gave evidence that he and Mr Sutherland had made measurements to determine the intermediate boundary; and that by those measurements the south‑east corner of the residence encroached "very roughly" by a metre ("It might be six inches one way, but roughly a metre") on to the eastern lot. The north‑east corner of the residence, he said, was very close to the intermediate boundary. The measurements were made by tape. They were made accepting the reliability of the boundaries to the east and west. They were made at the northern frontage and then back towards the rear of the residence.

Bearing in mind the evidence of Mr Tyrell that the fence on the eastern side of the eastern lot was up to 500 millimetres away from the true boundary[23], it seems likely that the measurements made by Messrs Sutherland and Edgar were in fact close to the mark.
[23]Exhibit 26 shows that the fence was to the west of the true boundary.

Mr Sutherland gave evidence generally as follows: In 1978 he had valued the property for mortgage purposes. He had then made measurements and had concluded that the house straddled the boundary. In April 1993 he and his son had reported to the Pyramid Group (of which the defendant was a part) that they had been provided with conflicting accounts whether the residence was situated exclusively on the western lot (this was apparently a reference to the conflict between Mr Sutherland's own measurements and the situation as reported by Mr Glynn). In late 1994 he, Mr Sutherland, measured the property again in company with Mr Rolfe of his office and Mr Anderson. The measurements which were made confirmed his belief that there was encroachment.

Mr David Ellis of Fitzroys, who valued the property on the defendant's instructions in late January 1995, reported that on‑site measurements indicated that the residence, carport and external games room appeared to marginally encroach on to the eastern lot. In viva‑voce evidence he said that he had made measurements from the western boundary of the western lot using a steel tape. His recollection was that the encroachment was between a half and one metre.

Finally, I should refer to the evidence of Mr Rolfe. At the relevant time he was a valuer and real estate agent employed by Sutherland. I think that he had a poor recollection of events. He did not pretend otherwise. He gave some vague evidence of there being encroachment, and of this being checked.

All in all, the vast preponderance of the material which was available in the period December 1994 to February 1995 suggested that the residence (in which term it is convenient to include the garage and the rumpus room) did encroach to some extent on to the eastern lot. That was the firm opinion of the selling agents, and in my opinion they were entitled to hold that view. Mr Sutherland was aware of the pertinent part of Mr Glynn's report. He had made measurements before it and he made them thereafter. They were at odds with Mr Glynn's report. In making the later measurements he had the assistance of at least Mr Anderson. In Mr Anderson's case the measurements made in late 1994 confirmed his earlier informal estimate of the situation.

I next consider that the defendant (in reality Mr Edge, the representative of the liquidator) was entitled to accept, as he did, the statement of the selling agents ‑ confirmed by the independent report of Mr Ellis ‑ that there was encroachment. It may be said that a review of the defendant's recovery file by Mr Edge, or by Mr Armistead, the file manager working under his instructions, would have revealed Mr Glynn's report, or at least a fax sent to Mr Sutherland in April 1993 enclosing the pertinent part of that report. But it would also have revealed Mr Sutherland's response, and as well a fax dated 1 February 1994 which Mr Sutherland sent to Mr Fettes of Pyramid. Had Mr Edge or Mr Armistead read that material they might have thought that, as matters then stood, there was room for doubt whether or not the residence encroached. But then the joint marketing submission and later the valuer's report came to hand.

All things considered, the conduct of the defendant, whether by Mr Edge, the selling agents or the valuer, could not be said in my opinion to show a disregard for the question whether there was encroachment as might offer support for a conclusion that the defendant failed to seriously address the issue of sale in two lots.

So far as Mr Guss is concerned, I have serious doubts whether in the relevant period he believed ‑ at least without reservation ‑ that the residence did not encroach. Mr Anderson's informal measurement in 1992 or 1993 had indicated that it did. Mr Anderson had then suggested that Mr Guss arrange for a check survey. But that was not done.

Again, Mr Guss gave evidence of a number of discussions ‑ with Mr Edge, Mr Anderson and Mr Sutherland ‑ in which he pressed for the sale of the property in two lots. I am satisfied that he overstated the number of occasions on which he said any such thing. Further, his evidence that in such a conversation Mr Sutherland had "mentioned vaguely that he thought the house encroached"[24], but that he, Mr Guss, had protested the contrary, was highly improbable. Having had the advantage of hearing Mr Sutherland give his evidence I think it is very unlikely that he would have said something in the language attributed to him.
[24]At T.185 to 186.

Further again, if Mr Guss was to be believed he spoke to Mr Anderson saying that Mr Sutherland believed that the house may have encroached a little, but that he, Mr Guss, maintained the contrary. The thrust of his evidence was that Mr Anderson, most improbably, said nothing to suggest that the facts did not fit Mr Guss's professed view of things.

I should mention two other matters concerning Mr Anderson. First, Mr Guss gave evidence that Mr Anderson told him, years after the sale, that if there had been encroachment, which was doubtful, "the house could have been sold in two lots by easy realignment of the title, which would have taken just weeks, very inexpensively, and that would have overcome any problem, even if it did encroach ... but to his knowledge they never considered that"[25].
[25]T.194.

I cannot accept that Mr Anderson was likely to have said that encroachment was doubtful, that realignment would have taken just weeks, or that it would have overcome any problem. It was very clear on his evidence, as to the last of those matters, that any realignment would have created new problems.

Second, Mr Guss said that he spoke with Mr Anderson ‑ implicitly on the day of sale ‑ saying that he was disappointed that the property had not been sold in two lots. Mr Anderson said that there had been no such conversation. I believe him.

Finally concerning Mr Guss's professed belief concerning the issue of encroachment I should say that I am satisfied that at no time between sale in February 1995 and the commencement of bankruptcy proceedings against him in 1996 did he take up with the defendant its supposed ability to sell the property in two lots as things stood in February 1995, and the defendant's failure or refusal to do so.

In summary, I do not doubt that the question of encroachment required ‑ and received ‑ consideration by the defendant and its selling agents in late 1994 and early 1995. I further consider it likely that Mr Guss was at least doubtful that there was no encroachment; and that this is the probable explanation of what I conclude was his fairly muted assertion at the time that the property should be sold in two lots; and his failure to make complaint between date of sale and date of commencement of bankruptcy proceedings.

Was there a Breach by the Mortgagee of its Duty to the Mortgagors in Connection with the Two‑lot Issue?

According to the plaintiff's case the defendant, in the circumstances known at the relevant time, should have had a check survey done. Then, on an assumption that the survey would have revealed the extent of encroachment disclosed by the later survey, the property should have been offered in two lots. That could have been done by realigning the intermediate boundary, by demolishing the residence or by offering the property for sale with a demolition clause in the contract of sale for each lot.

The reason why the property should have been offered in two lots was said to be this: that each lot, offered separately, was likely to have achieved a sale price which cumulatively produced a very substantial premium on the range of figures suggested by the defendant's professional advisers; and a very substantial premium on the price which was in fact obtained.

In deciding whether the plaintiff has proved that the defendant breached the duty which it owed to the mortgagors, the core issue is whether, certainly or probably, the mortgagors were deprived of a premium on the sale price actually achieved. Unless it was at the least probable that sale in two lots would have achieved a premium (query how large) on the actual sale price, a complaint that the defendant failed to offer the property in two lots would get nowhere. It was not suggested for the plaintiff, to emphasise the point, that the mortgagee would have breached its duty if there was only a possibility of achieving a premium by sale in two lots.

Even if a premium was probable it does not follow that sale in one parcel was a breach of the mortgagee's duty. Other factors ‑ for example, increased holding costs ‑ might have rendered the assumed premium illusory. But a probability of achieving a premium would provide the plaintiff with a starting point in her seeking to prove that the defendant breached its duty to take reasonable steps to achieve the best possible price for the property.

According to the high watermark of the plaintiff's case, had the property been sold in two lots it would have realised between $1 million and $1.25 million per lot; and the price achieved was the then‑current market value for the property sold in one parcel. On this scenario there was thus an achievable premium foregone of some $350,000 to $850,000.

Counsel for the plaintiff, in his closing address, referred to evidence which supported the value of the two lots being $1 million to $1.25 million each. But he did not urge me to conclude that, if offered separately, each lot would have achieved a price in that range. Rather, he approached the matter by conceding that on the evidence the western lot was likely to have achieved a greater price than the eastern lot. Then he attributed to the western lot a value of $1.25 million, and to the eastern lot a value, variously "somewhere between $600(000) and a million", "somewhere in the vicinity of $700,000 to $800,000", "no less than $600,000" and "as a suitable median point ... $800,000".

Upon this approach the premium lost, putting any contras to one side, was something between $200,000 and $600,000.

Counsel for the plaintiff then submitted, whilst conceding that the selling agents had considered the question of sale in two lots, that the issue had not loomed large, and had not been assessed in depth. For that reason any discussion between Messrs Sutherland and Edge would have been superficial, and any decision by Mr Edge would not have been informed. The defendant was in breach of duty because its representatives ‑ Mr Edge, the selling agents and Mr Ellis ‑ had not adequately addressed the sale in two lots issue.

The defendant, for its part, contended that the price achieved by selling the land in one parcel was as much as was likely to have been achieved had it been capable of sale in two lots and had it been so sold. Moreover, counsel submitted, there were good reasons why, even if there was some prospect of a sale in two lots achieving a premium, his client should not have been saddled with the burden of "punting" on such a result; for me to conclude otherwise would be to impose altogether too heavy a burden on the defendant mortgagee.

I do not accept a number of the submissions advanced for the plaintiff. The plaintiff has not satisfied me that, certainly or at least probably, a premium would have been achieved had the property been sold in two lots. The plaintiff has not satisfied me that consideration of the issue by the selling agents was superficial. There were, on the evidence, a number of important reasons for not attempting to sell the property in two lots. I am satisfied that the selling agents between them brought most of these reasons to mind when advising Mr Edge, in substance, that the property should be sold in one parcel. The plaintiff has not satisfied me that the defendant through Mr Edge defaulted in its duty to the mortgagors by accepting the advice of the agents whom it had appointed (one of whom had been appointed on the insistence of the Guss interests); such advice being supported, in essence, by the later valuation. Whether viewed subjectively or objectively, I considered that there were multiple, weighty reasons for selling the property in one parcel.

In seeking to show that certainly or at least probably a premium would have been achieved had the property been sold in two lots the plaintiff relied upon the evidence of Mr Gilder, the real estate agent and valuer to whom I earlier referred, upon statements attributed to and parts of the evidence of Mr Anderson, and upon the evidence of Mr Bainbridge, a valuer called for the plaintiff.

The way in which the plaintiff sought to develop her position revealed, I consider, the essential weakness of her case. To show that a premium certainly or probably would have been achieved it was necessary for the plaintiff to contend that the price in fact achieved represented the market value of the property sold as one parcel. There was, in fact, much evidence that this was so. The Sutherland and Edgar joint marketing submission set a range of $1.6 million to $1.7 million. That range was confirmed shortly before sale ‑ after there had been inspections and after early 1995 Portsea property sales. Again, a marketing submission obtained from Prentice Real Estate dated 20 December 1994 set a range of $1.45 million to $1.65 million. On the evidence, the principal of that firm had good knowledge of the property. Then, in late January 1995 Mr Ellis provided a report which, taking recent sales into account, set a market value of $1.65 million and a realisable value of $1.5 million. Finally, I should mention the fact that the property was resold in one parcel in January 1997, effectively in the same condition as it had been in February 1995, for $1.925 million. The evidence satisfied me that the increased price was compatible with a rise in the market generally between 1995 and 1997.

Counsel for the plaintiff, then, as his client's case compelled, did not contend that valuation in the range $1.45 million to $1.7 million was wrong, or that the sale price was less than market value. That was so despite the evidence of Mr Bainbridge, a valuer called for the plaintiff. His evidence was in essence a critique of the valuation made by Mr Ellis. One part of that critique was an analysis of sales evidence in the valuer's report. The gist of that part of Mr Bainbridge's evidence appears in the last paragraph of his report[26]:

"There is no detailed analysis of the sales contained in (the) valuation and accordingly it is not clear how the valuer has arrived at his assessment of $1,650,000 which is equivalent to $408 per square meter on an improved basis. In this regard, the sales in the $429 ‑ $586 per square metre range are either significantly larger allotments or are located in Sorrento. The remaining sales are all in the range of $724‑ $1,333 per square metre on an improved basis. The rate applied ... effectively discounts these sales by 43‑ 70%, yet there is no explanation as to how this discount has been arrived at."

[26]Exhibit P.

Mr Bainbridge, I should add, was not instructed to and did not value the Guss property as at February 1995. Nor did he inspect any of the properties the subject of the sales evidence in the valuer's report.

I had imagined in the course of the trial that the plaintiff intended to rely upon Mr Bainbridge's evidence to support a proposition that, even considered as one parcel, the property had been sold at a gross under‑value. But in his closing address counsel for the plaintiff did not seek to use it in this way. He accepted, as I have said, that the property had been sold for market value. But he sought to rely upon Mr Bainbridge's evidence to show that, had the property been sold in two lots, it must have yielded a premium. The argument ran this way: the western lot was the more valuable. It should be accorded a value of $1.25 million. Evidence had been given for the defendant that, offered separately, the eastern lot, if it had been saleable, was likely to have realised $400,000 to $600,000. That was nonsensical because it would ascribe to the eastern lot a value of not more than $300 per square metre ‑ which was lower than the per square metre value of any of the properties comprised in the sales evidence. At $400,000 the per square metre value would have been an impossibly low $200. The only conclusion was that the combined value of the two lots sold separately must have been in excess of $1.85 million.

The weaknesses in the submission were these: first, valuing property on a per square metre basis is essentially unhelpful. It does not compare apples with apples. I accept evidence to that effect.

Second, the unreliability of the methodology was very likely to be accentuated in the case of Portsea clifftop properties ‑ in respect of which the evidence clearly showed that there were a multiplicity of features likely to affect the value of a particular lot. Mr Ellis himself acknowledged the significant limitations of sales evidence when valuing such a property.

Third, the plaintiff's position was inherently contradictory. The plaintiff sought to rely upon Mr Bainbridge's evidence to show that putting a value of $200 to $300 per square metre on the eastern lot, considered separately, was a nonsense. Yet despite Mr Bainbridge's evidence the plaintiff accepted that the property was sold at market value. That put a value on the property, considered as one parcel, of $408 per square metre. If, as counsel conceded, the western lot, considered alone, was the more valuable, it does not seem to me to follow that, even considered separately, there was anything absurd about the eastern lot having a value of only $200 to $300 per square metre.

Fourth, in order to establish that a premium had been foregone it was in truth necessary for the plaintiff to establish that the western lot, considered alone, had a market value of $1.25 million at time of sale. I do not consider, for reasons later discussed, that the evidence supported such a conclusion ‑ at least unequivocally. It could be concluded, had it been sensible to sell the western lot separately, that the value of that lot and the likely price achievable was in the range of $1 million to $1.25 million. It would be possible to conclude that a sale price at the higher end of that range may have been achievable. Beyond that, I consider, the evidence did not fairly lead.

The plaintiff's preferred approach to resolution of the core question was, then, flawed. But looking at all the evidence, has the plaintiff established that the two lots should have been sold separately?

In answering that question two matters need to be considered:

+Were there reasons of substance militating against a sale of the property in two lots; and, as a corollary,
+Did the defendant by Mr Edge, the selling agents and valuer conscientiously address the question whether there could and should be a two‑lot sale?

The answers to those questions, as I indicated earlier, are in my opinion "yes" and "yes". I should say why that is so.

First, to sell the property in two lots must have necessitated realignment of the intermediate boundary, or prior demolition of the residence (there was no suggestion for the plaintiff that partial demolition was an option), or sale of the property with each contract of sale containing a demolition clause. Each of those options had one or more distinct disadvantages. Unless it was at least pretty clear that sale in two lots would achieve a premium, none was an option that a mortgagee, on the most favourable view for a mortgagor, was obliged to take.

Demolition of the residence would have involved the defendant in a major and unwarranted gamble. It is true that the valuer did not consider that the residence added to the value of the land. Neither did Mr Gilder. But it was present, was evidently livable, and had the advantage of being sited at the northern end of the property. Its position was such that it did not conform with setback provisions contained in the relevant Planning Scheme. It could not be said with certainty that, particularly if the residence was first demolished, a planning permit was likely to be obtained allowing a new residence to be erected within the footprint of the old. Moreover, had the residence been demolished one type of buyer would have been excluded from the sales equation ‑ a buyer wishing to buy the entire property as it stood, this including what I consider to have been the inferior eastern lot. To these considerations may be added other problems that sale in two lots would have created. To those problems I shall soon refer.

Sale of the property in two lots, each contract containing a demolition clause, was advanced as an option that the mortgagee might have taken. The ramifications of taking such a course were hardly explored in evidence. The impact of such a clause on the sale price of the western lot, assuming that it was first offered, seems unlikely to have been favourable. A bidder would know, unless he or she was also prepared and able to buy the eastern lot, that what was being purchased was in essence a bare block. The cost of demolition was not the subject of evidence.

Realignment was possible. Having regard to the position of the residence the sensible if not the obligatory course would have been to shift the intermediate boundary about two metres east ‑ at least in the vicinity of the residence. Then a question would have arisen whether the tennis court surrounds should have been included in the eastern title. If so, it would have been necessary to realign the intermediate boundary in the vicinity of the tennis court towards the west.

Mr Cooksley's evidence satisfied me that an application to realign would have been successful. It would not have been costly. If there was a premium to be had, its cost would not have stood as a reason for not seeking realignment. There were, however, factors telling against realignment. I should set them out, not in order of importance. Most of them are matters which also tell against the validity of the plaintiff's demolition and demolition clause arguments.

First, the application to realign would as a matter of probability have delayed the time of sale. Estimates of the time that would have been taken to process an application varied between three and six months. There was evidence that Portsea properties are generally sold in January but that a successful sale had been conducted in June 1994. The plaintiff submitted that the last‑mentioned sale supported a conclusion that a desirable property could be sold at any time. I doubt that this was so. Mr Anderson described the June 1994 sale as involving a "very special property"; and he said that he doubted whether the eastern lot would have sold in June 1995[27]. But, even if the plaintiff's submission was accepted as a generality, there was a concern in early 1995 that interest rates were on the rise. That militated against delay in sale.
[27]T.665.

Second, any delay in effecting a sale would have affected both mortgagee and mortgagors. The mortgagors were incurring interest on a large sum. The mortgagee was at risk to holding costs.

Third, if there had been realignment, and assuming that the residence remained, the view from the eastern lot to the north‑west (and thus towards the Portsea pier and the water in that direction) was likely to have been considerably affected. The Guss residence was quite high and was situate well towards the north of the lot. Unless the buyer of the eastern lot was able to obtain a dispensation from the setback provisions of the Planning Scheme, any home erected on that lot would have been confronted to its north‑west by the residence on the western lot. That must have militated against a successful sale of the eastern lot. It could not be assumed that there would have been a dispensation from the Planning Scheme restriction.

Fourth, had there been realignment the eastern lot was likely to have been only about 18.3 metres (60 feet) in width; or else about that width at the north of the block and wider than 20 metres in the vicinity of the tennis court. To gain any water views a home must have been built towards the northern, narrower part of the lot. On the balance of the evidence water views from that lot were restricted both by the cypress tree on the foreshore and by the rise in the line of the foreshore. The latter effect was more pronounced on the eastern portion of the lot. A realignment which took away from that lot the western part of its frontage must have had a deleterious impact upon water views ‑ and I accept the evidence of Mr Anderson that water views were and are very important to the value of Portsea clifftop properties. In this way realignment was very likely to have impacted adversely upon the value of the eastern lot.

Fifth, despite the evidence of Mr Gilder (to which I shall later refer) I am satisfied that the cypress tree on the foreshore presented in late 1994 and early 1995 a considerable impediment to water views from the eastern lot. It is speculative whether the Foreshore Trust would have consented to its removal. There was evidence that the tree has been thinned out since that time. But I accept evidence of Mr Anderson the import of which was that the tree would still present a considerable impediment to water views. I consider that the presence of this tree would have impacted adversely upon the value of the eastern lot considered separately.

Sixth, the portion of the eastern lot on which it could be expected that a residence would be erected was, as I earlier noted, somewhat lower than its natural contours. Bearing in mind the evidence of Mr Cooksley to which I earlier referred, potential buyers of the eastern lot would sensibly have been a little cautious about assuming that water views from that lot could be enhanced by restoring the old contours.

Seventh, a potential buyer of the eastern lot was likely to have realised, if he or she wished to build towards the northern end of the lot and wished to have a driveway to the home, that the price to be paid was either removal of the tennis court or removal of the cypress trees shielding the lot from unsightly buildings to the east. Neither was a palatable option. Both were likely to have had a negative impact on the value of the lot had it been sold separately. There was a suggestion in cross‑examination of one of the defendant's witnesses that a buyer may have been able to erect a garage, perhaps on shared land, at the southern end of the property. I doubt that a potential buyer would have been enthusiastic about the prospect of carrying luggage and shopping 60 metres or so to a home situate on the northern portion of the lot.

Eighth, the effect of a realignment and of sale in two lots would have been to separate the existing residence and the tennis court. Together they formed an integrated whole. Mr Tyrell's survey plan shows that there would have been enough room to build a court on the western lot. The price to be paid would have been the removal of a number of quite large trees. Mr Ellis's evidence suggests that separating the residence and tennis court would not have been favourable from the standpoint of the value of either lot. There was no evidence, however, directed to the likely impact upon the value of the western lot of the fact that, if a buyer wished to erect a court on that lot, a choice would have been required between court and trees. On general principles the need to make such a choice would not be palatable.

The import of the considerations to which I have referred is this: A number of factors strongly suggested that the eastern lot was much inferior to the western lot. There was room for concern that, if the intermediate boundary was realigned, the eastern lot might be difficult to sell. There was reason to think that a delay in offering the property could be adverse ‑ that is, having regard to the risk that interest rates would rise, and having regard to a sale outside the popular selling season. In that context it would have been entirely understandable for the selling agents to have concluded that, having regard to their estimate of the value of the property offered as one parcel, very probably nothing would be gained by offering the property in two lots; and for Mr Edge to have accepted that advice, his role not being that of a gambler.

Having described reasons of substance militating against sale of the property in two lots, I turn to the question whether the defendant by Mr Edge, the selling agents and the valuer conscientiously addressed the issue. I will assume, in doing so, that if the answer to the question was "no" (I do not consider that it is) then the plaintiff could make out her case even though there were in fact good reasons for not selling the property in two lots.

It is perfectly clear each of Messrs Sutherland and Anderson were aware of what I have called the two‑lot issue and the related issue of encroachment. Their awareness arose necessarily from associations with the property even before they made measurements in November or December 1994; and, in Mr Anderson's case, from discussions with Mr Guss over the years. So also Mr Edge was aware of the inter‑related issues.

I am next well satisfied that Messrs Sutherland and Anderson considered but rejected the idea of realignment. I am satisfied that Mr Sutherland did not consider demolition as an alternative. Mr Anderson may have considered it. If so, he rejected it. I do not criticise either of them in that connection. It is, I think, clear that neither of them considered as an alternative the inclusion of a demolition clause in contracts for the sale of the two lots. I do not criticise them for failing to consider that option.

I next consider that, between them, Messrs Sutherland and Anderson considered in relation to possible realignment:

+ the extent of necessary realignment;
+the possible impact (for example, by a rise in interest rates) of any delay in sale occasioned by the realignment process;

+         the inferior situation of the eastern lot by reason of the impact of:
*         the cypress tree on the foreshore;
*         the rise in the line of the foreshore;
*         the relative depression of the northern   portion of that lot;
*         the position of the Guss residence.

I am satisfied that there was discussion between the two men at which these considerations were mentioned. It seems improbable that an issue that was known to exist and concerning which both men had views would have been the subject of oblique reference in the joint marketing submission without it being discussed between them quite thoroughly.

It is, I think, clear that neither Mr Sutherland nor Mr Anderson estimated the value of the lots separately. They rather fixed upon a range of figures as the value of the property in one parcel and in substance concluded that the consequences of realignment would be such that no better outcome was likely if the intermediate boundary was realigned and the property was sold in two lots. Having regard to all the evidence I do not consider that their conclusion was wrong. Nor do I consider that, because they do not proceed to estimate the value of the lots separately, their approach should be held less than conscientious. Finally, because in my opinion their conclusion was well justified, even if their approach had been less than conscientious, and even if the defendant was liable to the mortgagors for some assumed breach of duty in those circumstances, the breach would not yield an award of damages. The same could be said if it was assumed that the defendant was in breach of duty because Mr Edge accepted the advice he was given by the selling agents and by the valuer.

I have found that it was not wrong for the selling agents to conclude that, if the intermediate boundary was realigned, it was unlikely that the value of the property in two lots was greater than the range fixed by them as its value in one parcel. I should explain that finding. The following considerations, not in any order of importance, are pertinent.

First, the value of Portsea clifftop properties varies, and varied in early 1995, according to their peculiar characteristics. The variation can be very considerable, as examination of the sales evidence in the valuer's reports shows. The reasons for variation were made clear by the evidence of Mr Anderson. A key feature telling for or against value was and is water views.

In the case of the eastern lot there were multiple considerations telling in favour of it having a relatively low value. I have mentioned a number of them already. Additionally, its frontage was in part on to a foreshore reserve, and partly on to land occupied by the Lord Mayor's Camp. It did not have, then ‑ and neither did the western lot ‑ an absolute beach frontage. Moreover, both lots were proximate at their southern end to the local hotel. That was considered by Mr Ellis to be a factor detracting from their value. Traffic considerations were pertinent in that connection.

Second, for reasons already discussed I do not accept the use that the plaintiff's counsel sought to make of Mr Bainbridge's evidence.

Third, I do not accept the evidence of Mr Gilder that the value of the eastern lot, if offered separately, was likely to have been the same as or perhaps a fraction less than the value of the western lot. The burden of the evidence overall was that the value of the eastern lot, so considered, would have been very considerably less. I have explained already why that was so.

Mr Gilder acknowledged that he was a friend or acquaintance of Mr Guss; but I consider that he did not let that circumstance affect his evidence. I think that he was objective in the opinions which he offered. That is not to say, however, that his evidence must be accepted. In the event, I consider that his understanding of the obstructive impact of the cypress tree, of the rising line of the foreshore, and of the Guss residence or a replacement thereof on the western lot much minimised their real extent. In the case of the cypress tree his evidence may well have been affected by his viewing it, except on the day of sale, from the residence on the western lot.[28]
[28]See T.259.

In his evidence Mr Gilder also assumed that a potential buyer of the eastern lot would not have been affected by knowledge that the Planning Scheme imposed controls on the height of buildings as well as setbacks; and that a potential buyer would have bid for the lot confident in the belief that a skilled architect could create water views despite the various obstructive features to which I have referred. It seems to me that the buyer in contemplation must have wanted the lot very badly.

Fourth, I consider that the evidence, carefully considered, did not sustain a conclusion that the western lot, if sold separately, would have had a value of $1.25 million.

The evidence of Mr Gilder was that, based on other sales he had seen, each of the lots, looking at them as vacant blocks, should have received about $1‑1.25 million ‑ slanted towards the top of that range. It was not a formal valuation, but represented his professional opinion. On general principles, he said, if you have two titles the sum of the parts is more than the sum of the whole.

The difficulty I have in accepting that evidence unreservedly in the case of the western lot is that I do not accept the central thesis, that is, that each of the lots had about the same value as a bare block. I could, of course, accept part but not all of this evidence. I consider that it would be difficult in the particular case to do so.

But even if I accepted Mr Gilder's evidence so far as it applied to the western lot it would not lead me to the conclusion which the plaintiff requires for the accumulation process engaged in by counsel in his closing address. Mindful that he must, colloquially, get past a total of $1.65 million, his starting point was $1.25 million for the western lot. I do not consider that Mr Gilder's evidence leads to that conclusion.

Further as to the value of the western lot considered separately, plaintiff's counsel relied upon statements by Mr Anderson to Mr Guss that a half‑acre block might be worth about $1‑1.25 million.[29]
[29]At T.656.

A consideration of Mr Anderson's evidence does not, however, fairly lead to a conclusion that the observation related to the Guss property.

In cross‑examination Mr Anderson agreed that, considering the western lot separately, it "could have realised in the vicinity of $1‑1.25 million"; and "depending on the day ... and other factors", closer to $1.25 million[30].
[30]See T.683.

Touching the western lot, that was the high water mark of his evidence from the plaintiff's standpoint. It certainly does not persuade me to a conclusion that the value of the western lot was evidently $1.25 million had it been offered separately.

Mr Ellis, the valuer, was pressed to put a value on the western lot, considered apart, as at early 1995. He set a range of $1 million to $1.1 million.

In all, I do not consider that the evidence justifies a conclusion that the western lot was likely to have had a value in excess of $1.1 million dollars at the pertinent time.

Fifth, what of the value of the eastern lot at that time? I have not accepted the extrapolation of Mr Bainbridge's evidence. I could not accept Mr Gilder's evidence upon the issue, for reasons discussed. Mr Anderson's statements to Mr Guss did not speak of the Guss property, still less of the eastern lot. In evidence, however, Mr Anderson said of that lot, following an assumed realignment

"maybe one could have got four to six hundred thousand dollars ‑ maybe. I don't know"[31].

[31]T.687.

Mr Ellis, pressed to value that lot, came up with the same range. He denied being privy to Mr Anderson's earlier evidence. I see no reason to disbelieve him.

In all, bearing in mind the need to consider each property on its merits, I think that Mr Anderson's estimate of the value of the eastern lot, which carried with it a concern that the lot might have been difficult to sell, should be accepted.

In the event, if the property had been valued as two lots in late 1994, putting aside concern about delay and questions of increased interest, direct costs and holding costs, the accumulation of the value of the two lots was, I consider, $1.4 million to $1.7 million (that is, $1 million to $1.1 million for the western lot, and $400,000 to $600,000 for the eastern lot). Bearing those figures in mind it very clearly was not an option to embark upon realignment or demolition ‑ each of which involved cost, and each of which had the potential to produce a deleterious outcome.

I should refer to two additional matters concerning the value of the property at the pertinent time. First, counsel for the plaintiff relied upon the repetitious reference in the course of Mr Sutherland's auction day spruiking to the property being on two titles. This was said by Mr Sutherland to offer an advantage to a buyer.

I do not regard what Mr Sutherland said as much advancing the plaintiff's case. He did no more than point out the obvious ‑ that purchase of the property would confer on the buyer the opportunity to gamble on obtaining a profit by way of redevelopment.

Second, it is the fact that the selling agents were on a commission which would vary according to the price achieved. I see no reason why selling agents would in those circumstances promote the sale of a property at a lower than appropriate range of values, whether the agent was one who acted regularly for a mortgagee, as did Sutherland, or otherwise, as in the case of Edgar.

The selling agents' conclusion ‑ that the property was not likely to bring any more if sold in two lots ‑ was, then, unimpeachable. That conclusion was transmitted to Mr Edge ‑ by implication in the joint marketing submission, and, said Mr Edge, in conversation between he and Mr Sutherland. According to Mr Edge he accepted the advice he was proffered. He considered he need go no further.

Counsel for the plaintiff submitted that Mr Edge should not be believed when he said he had discussed the issue with Mr Sutherland. The issue was important, a note would have been taken, and no note had been produced. There was, I think, something to this submission. But it seems very improbable that Mr Edge and Mr Sutherland did not discuss the sale orally; and the issue was certainly known to them both. I think it is probable that the issue was discussed. Mr Edge gave a credible reason why a note might not have been made. I accept, then, Mr Edge's evidence upon the matter.

In all, Mr Edge had available the opinion of the selling agents concerning the two lot issue. That opinion was, in essence, supported by the later valuer's report. It was not less than conscientious for him to rely upon the opinion of his professional advisers.

Sale of the Property on 22 January 1995?

A deed of settlement in the possession action brought by the defendant against Mr and Mrs Guss, in an action brought by the defendant against the guarantors of the mortgage, and in an action brought by the two older Guss children against the defendant, was executed on 24 November 1994.

By that deed the defendant agreed not to execute the judgment for possession (which was agreed to be entered) before 16 January 1995; whilst Mr and Mrs Guss and the two older Guss children agreed to give up possession that day.

Further by that deed Mr and Mrs Guss and the two children agreed to give the liquidator and his agents access to the property for marketing purposes, and to permit sales signage and inspections, from 1 January 1995.

It is finally convenient to note that orders made by consent on 28 November 1994 in the various proceedings included orders that the guarantors pay the defendant $1,210,092.32, and orders for costs in favour of the defendant.

In early December 1994 Mr Anderson suggested to Mr Edge that the auction be held on 22 January 1995.

On 7 December 1994 Mr Edge instructed Mr Armistead to obtain marketing submissions from Edgar, Sutherland and one other agent before 16 December 1994.

Sutherland and Edgar provided their joint submission on 13 December 1994, notwithstanding that a letter formally requesting the submission bore a later date.

The submission said this:

"Given that possession cannot be obtained until 1st January 1995 and noting the normal requirements placed on the liquidator to adequately promote and advertise the property for sale, we consider that an auction date of Sunday, 5th February at 2 p.m. on site provides an appropriate timetable for promotion."

The submission went on to say:

"We note that discussions are being held with Mr J. Guss (the Mortgagor) who has indicated he would prefer an auction date of Sunday, 22nd January 1995. We understand that if a further agreement can be reached with Mr Guss in respect to gaining vacant possession prior to Christmas 1994, that an earlier auction date (22nd January) may be considered provided adequate advertising can be arranged".

Based on a sale date of 5 February the draft advertising schedule proposed that advertising commence on Wednesday 4 January 1995.

Not until 13 December 1994 ‑ the date of the Sutherland and Edgar submission ‑ did Mr Armistead seek a marketing submission from Prentice Real Estate. Sought as a matter of urgency, a report dated 20 December was received on 21 December.

In failing to seek a marketing submission from Prentice until 13 December Mr Armistead was dilatory.

Sutherland and Edgar were appointed, orally, as agents in conjunction some time soon after 21 December (although appointment in writing was communicated much later).

On 23 December Mr Sutherland faxed Mr Armistead to the effect that discussions with Mr Anderson had led to a conclusion that adequate preparation and promotion would not permit a sale on 22 January, the earliest practical date being 5 February 1995.

Mr Edge made a file note of the conversation that he had with Mr Guss on 4 January 1995. According to that note Mr Guss "felt that the property ought be auctioned earlier than 7 February"; but agreed after discussion that the time did not allow for an earlier sale.

4 January was the date of the first newspaper advertisement. It showed the sale date as 5 February. By 4 January the opportunity for a sale on 22 January had plainly gone ‑ both because of the text of the first advertisement and because there was only about two and a half weeks between that date and 22 January.

There was a credible reason ‑ I put it in that neutral way for present purposes ‑ why the sale should preferably have been held on 22 January. That was the day fixed for the sale of another Portsea clifftop property, "Mandurah". Edgar was the selling agent in that case also. The evidence suggests that the proposed "Mandurah" sale date prompted Mr Anderson's suggestion to Mr Edge that the Guss sale be held on 22 January.

The argument in favour of a sale of the Guss property on 22 January was that the sale of "Mandurah" was highly likely to be highly successful; and there was then the potential for a euphoric flow‑on to a sale of the Guss property later that day.

For the defendant it was contended that "Mandurah" was likely to have attracted a different kind of buyer than would the Guss property. "Mandurah" was a smaller property but had the advantage of a quite recently built house designed by a highly‑regarded architect. It was the completed article, not the article in prospect. So, the defendant contended, no euphoric flow‑on could sensibly be postulated.

Further, contended the defendant, the sale of "Mandurah" was in fact an outstanding success; and the impact of that sale and others in the period between 22 January and 5 February was extant when the Guss property was sold. So, ran the argument, if it be conceded that there was room for a flow‑on from the sale of "Mandurah" to the advantage of the sale of the Guss property, then the flow‑on effect was as present on 5 February as it would have been on 22 January.

It is presently unnecessary to consider the two contentions just identified. The prior question is this: there being a credible reason to sell on 22 January, what caused that not to happen?

In my opinion the explanation lies mainly in the fact that Sutherland and Edgar were not appointed until shortly after 21 December. The appointment was made that late because there had been delay in seeking the Prentice marketing submission.

There was a second reason why the property was not offered for sale on 22 January.

According to Mr Edge, Mr Sutherland was told by Mr Guss that he did not want any marketing inspections between Christmas and New Year.

Mr Sutherland did not confirm that evidence.

A file note made by Mr Armistead on 19 December reads in part: "Robert Edge ... spoke to Joe Guss on 16 December 1994 and confirmed that the auction cannot be held on 22 January 1995 unless Joe Guss gave us possession immediately".

Mr Edge said that he had no recollection of the conversation; but he had absolutely no doubt that the file note would be accurate.

Mr Guss agreed that Mr Edge had said this to him. He had disagreed with there being a need to give vacant possession immediately.

It is likely that the file note reflects the position adopted by Mr Edge and not agreed to by Mr Guss. That provides the second reason why the property was not offered on 22 January. I do not accept the accuracy of the hearsay account of which Mr Edge gave evidence. As I said a few moments ago it was not the subject of evidence by Mr Sutherland.

I should say a little more about the two reasons why the property was not offered for sale on 22 January 1995. The Sutherland and Edge marketing submission did not suggest that sale on 22 January would be impossible if agreement could be obtained from Mr Guss to gaining vacant possession ‑ in fact, ability to have access, erect signage, and advertising would have been sufficient ‑ prior to Christmas 1994.

Up to 23 December, according to the evidence of Mr Anderson, that possibility remained alive. But as at that day the window of opportunity closed.

Had marketing submissions been received by 16 December there seems no reason why agents should not have been appointed on 17 or 18 December. The evidence supports a conclusion that, if agents had then been appointed, then subject to the question of the mortgagors giving access (not vacant possession) in late December 1994, the property could have been sufficiently marketed for sale on 22 January.

I turn to the second of the reasons.

I referred a little earlier to the conversation between Messrs Edge and Guss on 16 December. Mr Edge then told Mr Guss that sale on 22 January could be effected only if possession was given up before 1 January. Why that should have been said is difficult to understand. Perhaps it was an intended repetition of what the agents had said in the second passage of their joint marketing submission which I cited a few moments ago. In fact, of course, the sale was held on 5 February and possession was not given up, by agreement, until 29 January.

Whatever be the explanation for what Mr Edge told Mr Guss on 16 December, it is clear that even if selling agents had been appointed in time to conduct a sale on 22 January the conversation on 16 December would have ruled it out.

I do not consider that the position taken by Mr Guss on 16 December was unjustified. I do not consider it casts any light on the question whether the mortgagors would have been prepared to accept inspections prior to 1 January if that was the price to be paid for a sale on 22 January. I think that they would have been prepared to do so. There was, I add, evidence that access to the property was in fact given to Mr Anderson in December 1994 (inferentially after Sutherland and Edgar had been appointed selling agents).

Failure to offer the property for sale on 22 January: damage resulting?

I need not consider whether the pertinent conduct of Mr Armistead or of Mr Edge ‑ concerning each of which, in my opinion, criticism can be made ‑ constituted a breach of the mortgagee's duty to the mortgagors. Nor need I consider whether a mortgagee may still choose its time of sale. For I am not satisfied that any breach of duty was a cause of loss and damage to the mortgagors.

The only evidence supporting loss was that given by Mr Gilder. It was based on general principle, and was to the effect that, if a sale follows on from a very successful sale of a similar type of property, there is likely to be a wash‑on effect ‑ estimated in the present case as a 10 to 20 per cent premium on the price in fact achieved.

I doubt whether Mr Gilder's evidence of the premium that would or might have been achieved had the sale been held on 22 January provided a sufficiently sound basis for an award of damages. It really amounted to speculation, as counsel for the plaintiff in substance agreed in his closing submissions[32]. But antecedent to that, I do not consider that the plaintiff established the broad principle upon which Mr Gilder relied. Contrast with his evidence the evidence of Mr Anderson.[33]
[32]See T.255, 266 and 308.
[33]T.663 and 664.

If, however, the general principle was accepted, I do not consider that it could safely be applied in the present case.

There are four reasons for so concluding. First, "Mandurah" was a very different proposition to the Guss property, as I have already explained. It is fair to conclude that the crowd at the sale of the Guss property might have been greater had the sale been held on 22 January. But a bigger crowd does not equate to more potential buyers. Moreover, the evidence of Mr Anderson shows that the "Mandurah" under‑bidder attended the Guss auction and made no bid.

Second, there were sales in the interim which, together with the sale of "Mandurah", showed the overall strength of the market for Portsea clifftop properties of varying kinds. There is no reason to think that the impact of the various sales was dissipated by 5 February.

Third, considered independently and bearing upon the conclusion just expressed, the sale price in fact achieved was well in the range expressed by the various agents and by the valuer. Ultimately, the plaintiff's counsel did not challenge the accuracy of the valuation or the other estimates which looked at the property as one parcel. Save for the highest point of the range set by Sutherland and Edgar, then, to have achieved a sale price of more than $1.65 million would have exceeded the expectations of the experts.

Fourth, as I have said earlier, the property was resold in January 1997, in generally the same order and condition, and the price achieved was $1.925 million. The resale price was compatible with the rise in the market between 1995 and 1997, described in the evidence, for example, of Mr Anderson.

Looked at overall, the case for the plaintiff really invited me to conclude that the euphoria factor would have produced a sale figure beyond almost every expectation. I decline to accept that this was a probable outcome.

Conclusion

There must be judgment for the defendant.

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[2001] VSC 37

20 February 2001