Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381
[2022] VSC 381
•8 July 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2021 02698
BETWEEN:
| MANDA CAPITAL HOLDINGS PTY LTD (ACN 168 795 088) | Plaintiff/Defendant by Counterclaim |
| v | |
| PEC PORTFOLIO SPRINGVALE PTY LTD (ACN 617 041 988) | First Defendant/Plaintiff by Counterclaim |
| and | |
| MARTYN CRAIG BARNES | Second Defendant |
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JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 23, 24, 26 May 2022 |
DATE OF JUDGMENT: | 8 July 2022 |
CASE MAY BE CITED AS: | Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381 |
MEDIUM NEUTRAL CITATION: | [2022] VSC 381 |
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MORTGAGEE DUTIES – Section 420A of Corporations Act 2011 (Cth) - Whether best price obtained in exercising power of sale – Where sale advertised as mortgagee sale – Where price achieved less than outstanding liability to mortgagee – Effect of COVID-19 lockdowns on property market.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff and Defendant by Counterclaim | Mr I Hristovski | Meerkin & Apel |
| For the Defendants and Plaintiff by Counterclaim | Mr G Lubofsky | Bancroft Lawyers |
HIS HONOUR:
Introduction
The plaintiff, Manda Capital Holdings Pty Ltd (‘Manda’) advanced $6.39 million (‘the Loan’) to the first defendant, PEC Portfolio Springvale Pty Ltd (‘PEC’) pursuant to a loan agreement dated 28 August 2019 (‘the Loan Agreement’). PEC mortgaged land located at 2–10 Springvale Road, Springvale and 1690 Centre Road, Springvale (‘the Property’) as security for the Loan. The second defendant, Martyn Craig Barnes (‘Mr Barnes’), provided a personal guarantee and indemnity in support of the Loan (‘the Guarantee’) and further charged his interest in a property located at 6 Raymond Road, Seaford as security for the loan (‘the Charge). After PEC fell into default under the Loan Agreement, Manda exercised its rights as mortgagee to enter into possession of the Property. Manda subsequently sold the Property for $7 million pursuant to a contract of sale dated 22 December 2020 (‘the Sale Contract’). The sale settled on 23 March 2021. The principal and interest owed on the Loan exceeded the proceeds of sale from the Property.
By letter dated 5 May 2021, Manda demanded that PEC, as borrower, and Mr Barnes, as guarantor, pay to it the sum of $974,036.66, representing the balance then due under the Loan.
PEC and Mr Barnes (from here on collectively ‘PEC’) admit the Loan Agreement, the Guarantee, and the Charge; and further admit the default under the Loan Agreement and the Guarantee. They accept that the outstanding debt under the Loan Agreement and the Guarantee totals $1,245,849.69 as at 11 March 2022, the date these proceedings were filed, with interest continuing to accrue.
However, PEC brings a counterclaim against Manda, contending that Manda’s sale of the Property was contrary to s 420A of the Corporations Act 2011 (Cth) (‘the Act’), which section provides that:
Controller’s[1] duty of care in exercising power of sale
[1]Section 9 of the Act states that:
“controller”, in relation to property of a corporation, means: (a) a receiver, or receiver and manager, of that property; or (b) anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest …
(1)In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
(a)if, when it is sold, it has a market value--not less than that market value; or
(b)otherwise--the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
PEC and Mr Barnes allege that if Manda sold the Property in accordance with its duties under s 420A, it would have achieved a price of $7,800,000 (plus GST). It maintains that this loss of some $800,000 would have extinguished by set-off the outstanding liability under the Loan as at the date of settlement of the sale of the Property. Accordingly, PEC seeks that Manda’s claim now be dismissed.
In light of the above matters, the crucial issue at trial was the steps taken by Manda to sell the Property.
PEC led evidence from Mr Barnes, as well as expert evidence from Mr Peter Sagar (‘Mr Sagar’) of LAWD Pty Ltd, a licensed estate agent and certified practising valuer who gave expert evidence on the sales process followed by Manda. It also led evidence from Mr Yong Lim (‘Mr Lim’) of Knight Frank, a qualified valuer. Mr Lim was retained to undertake a retrospective valuation of the property as at both 14 December 2020 and at 23 March 2021. Mr Lim assessed the market value on both dates as $7.8 million.
Manda led evidence from one of its directors, Mr Michael Czarny (‘Mr Czarny’), and from the two real estate agents principally involved in the sale, Mr Michael Gross (‘Mr Gross’) from Gross Waddell, and Mr Clinton Baxter (‘Mr Baxter’) from Savills. Both Mr Gross and Mr Baxter were highly experienced real estate agents with considerable and unchallenged expertise in the sale of similar properties. In addition, Manda led evidence from Mr Bernard Cussen (‘Mr Cussen’) of Charter Keck Kramer, a certified practising valuer. Mr Cussen had been retained by Manda to undertake a contemporaneous market value assessment of the Property in December 2020, prior to its entering into the Sale Contract. As at 14 December 2020, Mr Cussen assessed the market value of the Property as being in a range between $6.2 million to $6.7 million.
In addition, Manda called expert evidence from Mr Grant Sutherland (‘Mr Sutherland’) from Sutherland Farrelly, estate agents and valuers, on the sales process for the Property.
The essence of PEC’s case was that Manda contravened s 420A of the Act by failing to take all reasonable steps to sell the Property for market value. In particular, PEC and Mr Barnes alleged that:
(a) the sales campaign was too short;
(b) the proposed advertising strategy was inapt in that it gave undue prominence to the fact of the sale being a mortgagee sale; and
(c) Manda should have extended the campaign into 2021 in light of the quality of the offers that it had received rather than entering into the Sale Contract.
The law
The parties did not differ on the relevant legal principles to be applied. Those principles were summarised aptly by the Court of Appeal of this Court in Boz One Pty Ltd v McLellan (‘Boz One’).[2] The Court of Appeal’s summary culminates in the statement that:[3]
the relevant question for the purposes of s 420A is whether the controller has failed to do what a reasonable and prudent person would do or has done what a reasonable or prudent person would refrain from doing in the circumstances.
[2][2015] VSCA 68, [153]–[158] (Whelan, Santamaria and Kyrou JJA).
[3]Ibid [158].
Relevantly, in Boz One the Court of Appeal later stated:[4]
The principles summarised at [153] to [177] above make clear that the scope of the duty in s 420A(1)(a) of the Act is not defined by prescriptive steps which always must be undertaken by a controller when exercising a power of sale. Rather, the scope of the duty is defined by a general obligation to ‘take all reasonable care’. As the authorities illustrate, what must be done to comply with this general obligation will depend on the circumstances of each case, including the nature of the assets being sold and the circumstances of the chargor. While the failure to take a particular step — such as an open market sale process — may constitute a breach of s 420A(1)(a) in some cases, the failure may not constitute a breach in others.
In deciding whether a controller’s failure to take a particular step constitutes a breach of s 420A(1)(a), that step should not be considered in isolation. Rather, the court should consider the controller’s conduct as a whole in the context in which the controller was required to make decisions about which steps to take and which steps not to take. The controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time.
[4]Ibid [371]–[372].
Whilst it is clear that s 420A of the Act imposes a more rigorous statutory duty upon a mortgagee or other receiver in relation to its power of sale than that provided by the general law duty of good faith,[5] the more rigorous duty imposed by s 420A does not detract from the common law principle that a mortgagee may sell at the time of its choosing and does not have to wait until a time when a better price might be obtained.[6]
[5]Ibid [157].
[6]Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 24 VR 617, 627 [48] (Neave and Redlich JJA and Forrest AJA).
As the relevant enquiry focuses on the process followed by the mortgagee, it is convenient to set out the steps taken by Manda to sell the Property. For the most part these were not the subject of dispute.
The Sales Process
On 4 September 2020, Manda sought marketing proposals from two estate agents, Gross Waddell and Savills. Manda considered that the combination of those agents would be most appropriate to effect the sale, given their complementary expertise in sales of properties similar to the Property. The Property was a development site located in a highly visible location on the south-western corner of Springvale Road and Centre Road, Springvale and comprising a site area of some 5186 square metres. On 2 July 2019, Charter Keck Cramer provided a valuation that assessed the market value of the property at $9.2 million and specified the highest and best use for the Property as redevelopment.
Manda considered, and it was not disputed, that Gross Waddell were particularly prominent in the sale of development sites, whilst Savills’ national profile and access to international buyers would neatly complement Gross Waddell’s expertise.
On 11 September 2020, Savills provided Manda with its sales and marketing proposal. The proposal described the Property as a “high profile gateway site” and recommended selling the Property by way of on-market expressions of interest (‘EOI’), involving a four week marketing campaign with EOI’s to close in late November 2020. In the recommended timetable, Savills noted that it was dependent upon the State-imposed COVID-19 lockdown (‘the Second Lockdown’) being lifted. Savills recommending that Manda wait for the current restrictions to ease prior to commencing the campaign.
Savills’ proposal anticipated a sale price of between $7 and $8 million, stating that the Property presented a compelling case to active buyers at that indicative price level. The proposal noted that Savills provided ‘reasonable price expectations and often exceed or greatly exceed our estimates of value’.
In its sales and marketing proposal, Gross Waddell also recommended that the Property be offered for sale by way of an EOI campaign of four weeks’ duration. The Gross Waddell proposal contemplated a campaign launch on 4 November 2020 with the EOI to close on 2 December 2020. Gross Waddell’s proposal supported this timeline with the statement that it anticipated that in early 2021 there would be a surge in distressed sales which would lead to deflated pricing in the market.
Gross Waddell was more optimistic than Savills in its pricing estimate, anticipating a sales price of between $8,038,300 to $8,842,130. However, it qualified this estimate by noting that values were difficult to assess at that time given the limited transactions that had occurred during the past six months when COVID-19 impacted the market. Despite these reservations, Gross Waddell noted that during the Second Lockdown there had still been a good number of enquiries on medium to large scale developments and owner occupied properties, and stated that the Property may well suit a sophisticated developer or occupier. The Gross Waddell proposal also recommended that the advertising material state, where applicable, that the sale was ‘under instructions from mortgagee’. Gross Waddell advised that this would provide interested parties with the comfort that the marketing of the Property was bona fide and that the vendor was not testing the market.
Aside from Gross Waddell having higher price expectations than Savills, each agency’s proposal was substantially similar; each recommended a four week EOI campaign and each emphasised the favourable location with high passing traffic and identified target buyers as developers and owner occupiers. Whilst both proposals noted that the Property had an existing planning permit for a hotel and an operating heads of agreement with Hyatt Hotels, Gross Waddell was pessimistic about the possibility of a hotel development on the Property given the present and anticipated state of the tourism market during the COVID-19 epidemic.
After considering the respective marketing proposals, Manda determined to engage Gross Waddell and Savills on a joint basis and to specify a marketing budget of about $25,000.[7]
[7]The actual sales authority refers to $26,872.03. $25,000 was the figure referred to in Manda’s email to the agents advising them of their appointment.
Notwithstanding Manda advising the agents of their appointment on 28 September 2020, the formal sales authority was not signed until 21 October 2020 (‘the Sales Authority’).[8] By the terms of the Sales Authority, Manda conferred an exclusive agency on Savills and Gross Waddell for a period of 120 days. The Sales Authority included references to an estimated sale price of between $7 million and $7.7 million.[9]
[8]The delay between the notification of appointment on 28 September 2020 and the execution of the Sales Authority on 21 October 2020 was a result of a request by PEC’s solicitors for an extension of time before the appointment of selling agents, presumably on the basis that PEC wished to explore refinancing options in the meantime.
[9]An estimate of the sale price was required to be given pursuant to s 47A of the Estate Agents Act 1980 (Vic).
On 6 November 2020, Savills forwarded a draft marketing brochure to Manda for approval. The marketing brochure highlighted the Property as a landmark Springvale corner site with EOI’s to close on 3 December 2020. The Property was described as a ‘triple fronted corner site with incredible exposure and significant potential’, and the drone camera generated photo which dominated the brochure included reference to nearby sites and attractions. On the top right-hand side of the brochure there was a black block with the words ‘mortgagee sale’ written in gold.
Manda was happy with the form of the proposal brochure but suggested that the reference to ‘mortgagee sale’ should stand out more and perhaps could be highlighted in a bright red colour. This was adopted in the version of the brochure that was ultimately produced and the black box was replaced with a larger semicircular red shape on the right-hand side which had the words ‘mortgagee sale’ in white. Otherwise, the brochure was largely in the form of the draft. Subsequent newspaper advertisements were in similar form.
On 8 November 2020, the signboards for the Property were erected on site. The words ‘mortgagee sale’ were written prominently in red at the top of the signboards. The boards described the Property as a ‘Landmark Corner Site’, and reproduced the aerial photograph which had appeared in the brochure. The format of the signboard apparently conformed to Savills’ standard style guide.
On 10 November 2020, the EOI campaign formally launched and drew considerable interest from prospective buyers. In an email to Manda of 17 November 2020, Savills noted that it had received from potential buyers multiple requests for contract of sale documentation and multiples requests to review the existing plans and permits. To similar effect, on 20 November 2020 Savills provided Manda with a campaign progress report which recorded that the website for the campaign had been visited some 1327 times and that 94 parties had registered their interest in the Property. The campaign progress report described this as ‘solid initial interest’. The report further noted that ‘the quantity and quality of those who have shown interest at this stage is all quite positive’ and that the e-flyer[10] and internet platforms had proved to be highly effective in generating interest beyond the agent’s own personal and direct contact with identifiable potential buyers.
[10]Presumably, a reference to the brochure.
The report noted that the Property had generated positive feedback in relation to its high exposure location and flexible development parameters; its versatility in relation to a potential wide range of commercial uses; and the fact that it was seen as a genuine offering with a motivated vendor. The negative feedback that had been received apparently related to the absence of available plans and permits; the fact that the existing hotel development proposed on the site and the heads of agreement with Hyatt Hotels did not add much value; and that there were concerns around potential environmental remediation costs.
A campaign update sent by Savills on 27 November 2020 was to similar effect noting that there was now a total of 114 registered parties. This was described as a very positive number which showed that market awareness of the campaign was high.
In the campaign update, Savills advised that from this point on they would contact all interested parties to ensure that they had all the information they needed, and would endeavour to ensure that those prospective buyers who had an ongoing interest would participate in the process and bid strongly on an unconditional basis. The campaign update noted positive and negative feedback largely in the same terms as the earlier campaign progress report, but now noted a planning concern that if buyers altered the use of the site to retail, that the council might see this as an underdevelopment of the site. The campaign update referenced the fact that the agents were yet to receive the contract of sale and vendor statement, noting that these documents were required without delay.
After some delays, Savills and Gross Waddell were provided with a copy of the contract of sale and vendor statement on 1 December 2020 and informed interested parties that the contract and vendor statement were available by request.
When the EOI campaign closed on 8 December 2020, three parties had lodged EOI’s in the following terms:
(a) $6,500,000 with a 5% deposit and a proposed settlement date of six months,
(b) $5,850,000 with a $350,000 deposit and a proposed settlement date in 12 months; and
(c) $4,520,000 with a $200,000 deposit and a proposed settlement date of 21 days.
Each of the three expressions of interest lodged was subject to conditions. Those attached to the $6,500,000 offer were straightforward: the vendor was to clarify the current leasing status as the purchaser required vacant possession, and the prospective buyer wanted his consultant to have access to the site prior to settlement. The $5,850,000 offer was subject to a 21 day due diligence period which was required for access to the site to carry out environmental investigations as required, and also was subject to a requirement that the vendor allow access to the site during the settlement period for the buyer to undertake any remediation work. The $4,520,000 offer was subject to the purchaser’s lawyers completing satisfactory due diligence.
Gross Waddell emailed Manda attaching a summary of the offers under cover of an email which read:
This afternoon saw the close of the EOI process for Springvale Road albeit not the end of our hard work.
Throughout the campaign there has been significant amounts of activity and this is summarised below for easy reference:
• Enquiries: 145
• Requests for contracts: 16
• Offers received: 3
Whilst the number of offers received is below expectation we have several buyers to work with including the top buyer being unconditional and a potential future occupier. We have attached the summary of the offers as well as the EOI forms for your reference.
The reference to the top offer being ‘unconditional’ was presumably sent in the expectation that the Manda would likely clarify that that vacant possession could be provided and further grant consultant access prior to any settlement.
As foreshadowed in the email, Mr Czarny met with Mr Gross and Mr Baxter via Zoom to discuss the offers received. Mr Baxter and Mr Gross advised that most of the interested parties had withdrawn their interest at the $6 million price range. Mr Czarny asked whether there was enough interest from other parties to extend the EOI campaign. Both Mr Baxter and Mr Gross said they did not see any merit in extending the campaign and considered that doing so would signal to the market that the seller was desperate and that the EOI campaign had not yielded sufficient interest. They said that this message would also be conveyed to those offerors who had already lodged EOI’s. Both Mr Baxter and Mr Gross recommended that they undertake further negotiations with interested parties to see whether they could increase their offers, and suggested that the most likely buyer was the party who had made the offer for $6,500,000 and who wished to utilise the site as an owner occupier (‘the Buyer’). Manda accepted that recommendation and did not extend the campaign or otherwise withdraw the Property from the market.
The attempts to procure a higher offer from the Buyer were successful, and on 14 December 2020 the Buyer made an offer for the Property by way of the provision of a signed contract of sale at $7 million, payable as to a deposit of $350,000 by 15 December 2020 with the balance of $6,650,000 due at settlement scheduled to take place on 15 March 2021. The further negotiations had therefore resulted in an increase in the price of some $500,000 and a shortening of the settlement date from six months to three months. As Mr Czarny noted, the expedited settlement was no small thing, given that interest was accruing under the Loan Agreement at approximately $110,000 to $130,000 per month.
On 15 December 2020, Manda obtained an updated valuation of the Property from Charter Keck Cramer. It had sought the same on 8 December 2020 when the EOI campaign had closed. The valuation provided by Charter Keck Cramer specified a current market value of between $6.2 million and $6.7 million exclusive of GST.
In the light of those considerations, on 22 December 2020 Manda accepted the $7 million offer and signed the Sale Contract.
Background to the complaint
Before considering PEC’s complaints about the sales process in more detail, it is necessary to recall the circumstances which existed in metropolitan Melbourne in the latter part of 2020. Both Manda and the defendants accepted the relevance of those factors but relied upon them in different ways. In July 2020, metropolitan Melbourne went into the Second Lockdown. On 16 August 2020 the State Government imposed the five kilometre rule which effectively confined residents, aside from essential workers, to a distance of no more than five kilometres from their home. On 27 October 2020 the Second Lockdown ended, but various restrictions such as density limits remained. Ultimately, by 9 November 2020 most of the restrictions had been removed.
Manda relies upon these matters to illustrate the uncertainty which existed in the relevant market at or about the time of sale. That uncertainty extended, so it submits, to the general economic outlook at the time, including for the property market in the first six months of 2021.
In contrast, PEC argues that the impact of the Second Lockdown was such that it affected the capacity of individuals to conduct their affairs in a timely and efficient manner even after the restrictions were removed. PEC submits that in the latter months of 2020 it generally took longer for tasks to be carried out and that this affected the sales campaign. It argues that the relatively simple tasks of retaining a solicitor to undertake the review of a contract or engaging an environmental consultant to carry out a site inspection took longer, whether because of tiredness or a hangover from the lockdown period, or because of a backlog of work. Regardless of the precise cause, PEC submits that the latter months of 2020 had unusual features which must be considered when assessing the reasonableness or otherwise of the steps taken by Manda to sell the Property. PEC argues, and Manda did not dispute, that for the purposes of assessing the reasonableness of the steps taken by Manda, the acts or omissions of Gross Waddell and Savills, as Manda’s agents, can be treated as Manda’s conduct for the purpose of evaluating compliance with s 420A of the Act. Relevantly, the bulk of PEC’s complaint is with respect to decisions made or advised by Gross Waddell and Savills, rather than the conduct of Manda itself.
Against the background of those matters, it is convenient to delve into the detail of PEC’s complaints. PEC relies on two grounds in support of its claim that Manda breaches s 420A of the Act; namely that:
(a) the sales campaign was too short, in that:
(i) it only ran for 4 weeks; and
(ii) was not extended;
and
(b) the advertising was insufficient, particularly in that it emphasised that it was a mortgagee sale.
For the reasons which follow, there is little merit in PEC’s counterclaim. The grounds alleged do not, either singly or in combination, substantiate any breach of Manda’s duty under s 420A of the Act.
The length of the sales campaign
PEC relies upon Mr Sagar’s evidence to the effect that a four to five week on-market EOI campaign would be the minimum duration required for the Property and that further during the lockdowns of 2020 (and, to an extent, post-lockdown where public health advice was to work remotely if possible) longer campaigns were often required due to delays in mobilising solicitors and consultants to enable proper due diligence to occur and contracts to be reviewed.
In contrast, Mr Sutherland’s evidence was that a four week campaign was appropriate, and that four to four and a half weeks was the industry average, with agents generally concluding that campaigns that run beyond this length ran the risk of becoming stale and losing momentum. In Mr Sutherland’s opinion, a campaign of beyond four and a half or five weeks would generally only be employed for a particularly complex property that required significant due diligence. Mr Sutherland’s opinion was that a four week campaign for the Property was sufficient.
The suitability of the four week marketing campaign was also asserted by Mr Baxter and Mr Gross. This was hardly surprising as both had recommended this in their sales and marketing proposals.
I have no hesitation in concluding that a four week campaign was entirely adequate, if not best practice, in the circumstances.
First, there was undisputed evidence that Gross Waddell (and Mr Gross) and Savills (and Mr Baxter) were extremely experienced real estate agents, and had particular expertise in the market for development sites in inner suburban Melbourne. Thus, two very experienced agents with unimpeachable expertise in the particular market in which the Property was advertised had recommended that a four week campaign was appropriate. Their assessment was endorsed without qualification by Mr Sutherland. In addition to being a qualified valuer, Mr Sutherland’s company, Sutherland Farrelly, has also specialised, since its inception in 1977, in insolvency-related matters including in relation to sales by receivers and mortgagees. Mr Sutherland also has had extensive experience in the sale of commercial properties throughout metropolitan Melbourne and greater Victoria over a 30 year period.
The fact that Mr Sagar may have considered that an extra one or two weeks may have been warranted due to the unusual circumstances which existed at the time does not mean that a four week period was unreasonable. As Mr Sagar accepted, the four week marketing period was within the acceptable range of marketing period; so much is implicit in Mr Sagar’s evidence that a four to five weeks was the minimum campaign duration.
Secondly, the four week campaign attracted considerable interest. As the above recitation of events reveals, the Property attracted a level of interest sufficient to give rise to 145 buyer registrations and the provision of 11 contracts of sale to prospective purchasers. The uncontradicted evidence from Mr Gross and Mr Baxter was that prospective buyers did not withdraw because they did not have sufficient time to undertake an assessment of the Property. Rather, they dropped out because they were told that the vendor was looking for a price of $7 million or more, where the buyers’ interest was generally at a price of up to $6 million..
PEC criticised this evidence and submitted it should be rejected, arguing that neither Mr Baxter nor Mr Gross produced any contemporaneous file notes or text messages relating to their discussions with interested parties. Such a submission assumes that it is the ordinary practice of real estate agents to take file notes much like a solicitor or banker does. Mr Baxter said that this is not the ordinary practice of real estate agents. That is not surprising; no doubt a real estate agent’s focus is on working with parties who are interested in buying property and not in recording in a documentary testimonial the negative feedback of uninterested parties. Moreover, the Mr Baxter and Mr Gross’ oral evidence to that effect is entirely consistent with three undisputed facts; that the EOI campaign did elicit considerable interest and requests for copies of the sales contract; that the agents advised prospective buyers that the vendor was looking to sell for $7 million; and that despite the high number of interested parties, a lesser number lodged EOI’s.
Thirdly, and notwithstanding the email from Gross Waddell to Manda to the effect that it was disappointing that only three EOI’s were received, it is nevertheless the fact that the sales campaign generated a sale for $7 million. This price was within the range, albeit at the lower end, of the agent’s estimate in the Sales Authority as executed, and in fact exceeded the market value of the Property as assessed by Charter Keck Cramer on 15 December 2020.
Nor do I accept, against the above evidence of the adequacy of the four week period generally, PEC’s submission to the effect that the four week period was insufficient as it made it difficult for prospective purchasers to properly assess the Property, including by engaging solicitors to undertake a review of the contract of sale or engaging consultants to undertake environmental investigations.
In relation to the former proposition, PEC points to various emails from Savills’ Mr Baxter to Manda during the course of the marketing campaign which expressed with increasing frustration the absence of timely provision of the Sale Contract. PEC relies upon these matters to submit that the lack of a Sale Contract before 1 December 2020, in circumstances where the EOI campaign closed on 8 December 2020, prevented prospective buyers who otherwise would have been interested in the Property from lodging EOI’s. In that respect, PEC also relies upon Mr Sagar’s evidence that ‘the delay in preparation and provision of the contract of sale and vendor statement to the agents and therefore to prospective purchasers would have made it difficult for purchasers to actually complete due diligence and submit an offer with confidence’.
I have no hesitation in rejecting the significance of this alleged late preparation and provision of the contract of sale. Putting aside the generality of Mr Sagar’s evidence, Mr Baxter gave evidence that in his experience as long as the contract of sale was available in the last week that was sufficient. In any event, the evidence of Messrs Gross and Baxter was that the primary advantage of an agent having early access to a contract of sale is that it enables the agent to track those parties who are genuinely interested in the Property and who thus ask for the contract, as opposed to those who are merely curious onlookers. There was little evidence that early access to a contract of sale was necessary or even particularly helpful to assist a prospective purchaser in undertaking a comprehensive due diligence of the Property in this case. Mr Sutherland’s opinion was that five days was sufficient for any due diligence, and in any event a feature of the EOI mode of sale is that it was open to prospective buyers to lodge an EOI on the basis that their offer was subject to review of the contract; indeed, one of the offers was made on such terms. Finally, I note that the Sale Contract was in utterly unremarkable form; there are no special conditions of any significance. The sale is that of a Property with no encumbrances of note on vacant possession and on standard terms. As a result, any due diligence of the Sale Contract was likely to be minimal.
I am similarly unpersuaded by the argument that the insufficient time period meant that prospective buyers did not have sufficient time to engage environmental consultants (or, for that matter, any other specialist consultants) to undertake investigations as to the contamination risk associated with the Property. PEC emphasises that the Property was formerly zoned as industrial and had previously operated as an automotive mechanic and as a result had underground storage tanks.
The agents’ campaign update noted that buyers had identified that the site might require environmental remediation for certain uses. Further, both Mr Sutherland and Mr Gross accepted that in order to understand the likelihood of contamination buyers might want to engage a soil engineer or a consultant to undertake tests.
Nevertheless, I have no hesitation in rejecting this factor as a relevant indicium of the sales campaign being unreasonably short.
First, both Mr Baxter and Mr Gross gave evidence that no buyer ultimately conveyed that difficulty to them, much less desired to undertake a detailed environmental assessment prior to lodging any EOI.
Secondly, as both agents noted, for a prospective buyer to justify the costs associated with such an assessment, generally that buyer would want to know that their offer is likely to be accepted. As such, the agents emphasised that it is open to any prospective bidder to lodge an expression of interest but to attach a condition to it such that it was conditional upon subsequent environmental investigations. This indeed happened in the case of one of prospective buyers, as evidenced by the relevant EOI .
Thirdly, the extent of the perceived environmental problem would plainly be a matter which might be of relevance to some buyers, but entirely irrelevant to others. For example, a buyer who wished to undertake excavation work for the purposes of constructing a basement carpark may well be interested in ascertaining the extent of any soil contamination. On the other hand, a buyer who wished to erect a retail building on the site, such as a convenience store with drive-through access (as was in fact the case with the successful bidder) or occupy a purpose-built office or showroom on site, would not have any such concerns. There was no evidence that any prospective buyer dropped out or otherwise chose not to participate in the EOI process because of any difficulties in engaging consultants to undertake a due diligence in the time provided.
The same conclusion applies in relation to the delay in obtaining a copy of the plans for the hotel. There was some dispute about whether this was the fault of PEC. Nothing turns on this as there is no evidence that the alleged late obtaining of this information had any impact on the sales campaign. Rather, the evidence was to contrary effect: few if any buyers expressed interest in the Property for hotel development.
Failing to extend the campaign
Relatedly, PEC alleges that Manda breached s 420A of the Act by, in reliance on its agents’ advice, declining to extend the EOI campaign into 2021. They submit that this was the appropriate course upon having received only three offers at the levels set out above. They are also critical of a specific response from Savills to a prospective buyer who made an enquiry shortly after the EOI had closed.
PEC relies upon Mr Sagar’s opinion to the effect that the agents ought to have recommended that Manda extend the campaign period beyond the four weeks and conduct a private sales campaign in February 2021, ‘rather than selling the property at the bottom of the quote range as a result of a relatively truncated campaign which generated limited interest’. According to Mr Sagar, doing so would have attracted buyers with greater focus and attention, increased competition among prospective buyers, and resulted in a higher sale price for the Property. In Mr Sagar’s opinion, this course would have countered the ‘market fatigue suffered by purchasers after 150 days of lockdown in 2020’.
As Mr Czarny noted in cross-examination, such a course would have carried significant risks, including because interest continued to accrue under the Loan Agreement at about $110,000 to $130,000 per month. Thus, to extend the campaign to February 2021, leading to a possible sale in March 2021, would have required the sale price to have increased by in excess of $300,000 to offset the additional interest.
Unsurprisingly, both Mr Gross and Mr Baxter rejected this criticism. They pointed out that to readvertise the property in the New Year would convey to the market that the sales campaign in late 2020 had failed. This would lead to a perception of a lack of interest in the Property and have a deleterious effect, reducing the chance that either existing interested parties would make offers at increased prices or that new offers would be attracted. Mr Sutherland likewise expressed the opinion that it was not common to extend an EOI campaign once it had closed, as this would telegraph to the market a lack of interest in the Property and suggest a failed campaign, removing competitive tension from the sales process. In his view, such a course would have likely resulted in the campaign losing all momentum and lead to the enquiring parties concluding that the vendor’s expectations were in excess of the market value of the Property. Against this background, the Property was likely to languish on the market over the Christmas and New Year period and into the uncertainty of 2021.
I note additionally that Gross Waddell in its marketing proposal had adverted to the likelihood of a general downturn in the market generally in 2021.[11]
[11]See [21] above.
I do not accept Mr Sagar’s evidence over that of Messrs Baxter, Gross, Sutherland and Czarny. There is a significant element of generality and speculation in Mr Sagar’s opinion. For example, his opinion took as its premise both that there was market fatigue in the latter months of 2020, and that a delay into the New Year would have attracted buyers with greater focus and attention. Whilst I need not conclude that this view is unreasonable, the fact that Mr Sagar may have had that opinion does not thereby render unreasonable the contrary opinions held by those agents, who were in fact active in the market at the relevant time, such as to give rise to a breach by Manda of the obligations imposed on it by s 420A of the Act.
Further, I attach greater weight to the evidence of Messrs Baxter and Gross than to Mr Sagar’s generalised assessment of market fatigue. On the facts, the EOI campaign generated significant enquiry and ultimately led to a sale in a difficult market and at a price within the range of the expectations set by the agent at the commencement of the campaign. Mr Baxter also gave evidence that it was Savills’ experience that there was a release of pent up activity in the market in the post lockdown period at the end of 2020, rather than market fatigue.
Further, Mr Sagar was not provided with a copy of the Charter Keck Cramer valuation carried out on 15 December 2020; nor was he briefed with the valuation conducted by Mr Lim, which was not produced until 11 March 2022, two days after his report was produced on 9 March 2022. Rather, Mr Sagar was briefed with an earlier valuation of the Property by Charter Keck Cramer but with a valuation date of 2 July 2019, in which Mr Cussen assessed the market value of the property at $9.2 million. Mr Sagar accepted that had he been provided with a copy of the 15 December 2020 valuation provided by Charter Keck Cramer, it might have altered the opinions he expressed in his report.
In my view, the earlier valuation conducted by Charter Keck Cramer has to be put to one side. It was a valuation undertaken some 17 months earlier at a time when the economic circumstances, and the state of the property market generally, were far different than in December 2020. If the earlier Charter Keck valuation is ignored (as it should be), then the circumstances which confronted Manda in mid-December 2020 when it determined, on advice, not to extend the campaign into the New Year were: that it had received an offer which was within the range of the expected selling price proffered by its agents at the commencement of the campaign; that the likely state of the market in 2021, to say the least, uncertain (if there was not a belief that the market would deteriorate); that interest continued to accrue under the Loan Agreement at a rate in excess of $110,000 per month; and that a current valuation, by the same valuer who had acted in July 2019, suggested that the sale price was in excess of the market value.
In those circumstances, there is an air of unreality about the suggestion that Manda should not only have declined the offer of $7 million, but have instead taken the Property off the market or alternatively extended the EOI campaign into 2021, where there was no guarantee, or even indication, that a better price would be achieved.
The defendants seek to impugn Mr Cussen’s December 2020 valuation on the basis that he was told by Gross Waddell that at the conclusion of the EOI campaign there were three offers and that the highest offer was $6.5 million, and that he unreasonably took that into account in his assessment of the then current market value of the Property. Instead, the defendants submit that Mr Lim’s evidence as to the market value of the property as at December 2020 should be preferred. The defendants argue that Mr Lim’s valuation was in the amount of $7.8 million plus GST and note that Mr Cussen accepted that Mr Lim’s opinion was not an unreasonable one.
Before dealing with the challenge to Mr Cussen’s assessment, it is convenient to deal with Mr Lim’s evidence. First, the difference between the $7 million sale price and Mr Lim’s assessment is not so great as to ring alarm bells. Secondly, to characterise Mr Lim’s opinion as a valuation of the Property at $7.8 million is something of an oversimplification.
In fact, Mr Lim’s assessment was that the market value of the Property was in the range of $7,260,000 to $8,300,000. The resultant valuation certification at $7.8 million represents the midpoint of what Mr Lim considered the market value of the Property. Notwithstanding that the $7 million sale is just shy of the lower end of Mr Lim’s range, the fact remains that $7 million is very close to what Mr Lim considered a sale within the range of the market value of the Property. Moreover, Mr Lim considered that there was no relevant change in that range as at March 2021. Thus, if Manda had in fact extended its campaign and achieve a sale in March 2021 at a price of $7,260,000, which would have been within Mr Lim’s range, such a sale would have left both Manda and the defendants worse off due to the increased interest that would arise in the period between December 2020 and March 2021. In those circumstances, Mr Lim’s evidence does not support a claim that Manda acted unreasonably in declining to extend to the sales campaign.
Further, I reject the criticism made of Mr Cussen. It would be unusual, one would expect, for a valuer undertaking an assessment of the market value of the Property as at 15 December 2020 not to be informed of the product of a recently concluded sales campaign. Beyond accepting that he had been informed of the offers made and that the fact that the highest offer of $6.5 million would have had ‘some impact on his assessment of the value of this property’, Mr Cussen was not otherwise challenged on his valuation. That valuation followed a relevantly identical methodology to that used by Mr Lim, where an assessment of the market value of the Property was derived by reference to a series of comparable sales. Whilst the comparable sales relied upon by Mr Cussen were different to those relied upon by Mr Lim, neither Mr Lim nor Mr Cussen were challenged as to their choice of comparable sales and the appropriateness or otherwise of the assessments that they made in light of them.
Valuation is often described as an art, not a science, and it is well understood that two valuers acting competently could come to different conclusions as to the value of a particular property on a given day. Absent any challenge to each valuer’s choice of comparable sales which did not occur in the present case, I am not in a position to prefer the evidence of one over the other. Rather, I conclude that the difference between their two valuations is simply a product of reasonable judgment by appropriately qualified persons.
Nevertheless, for present purposes what is significant is that the decision made by Manda not to extend the sales campaign into 2021 needs to be assessed in the context of its receipt of Charter Keck’s December 2020 valuation and in light of the advice received from its agents. I am quite unable to conclude that either the advice given by Gross Waddell or Savills not to extend the campaign or otherwise remarket the property in 2021, or Manda’s decision in light of that advice is such as to give rise to a breach by Manda of s 420A of the Act.
I also reject the specific criticism of Savills in its response to an enquiry made after the close of the EOI. A little over an hour after the EOI closed, a director of Multifield Property Group (‘Multifield’) emailed Savills asking for the expected price range that the vendor was looking to achieve. Mr Baxter responded saying that the EOI had closed at 2:00pm that day and that they were quoting ‘circa $7M’. Multifield replied noting that it had missed the EOI close and asking Mr Baxter to let it know how he went. Mr Baxter responded by saying ‘it’s a mortgagee sales so we will be just be selling it ASAP, it will be sold within a week’.
Mr Sagar criticised this response, stating that it could be interpreted as conveying that the sale was under compulsion in a distressed market. Mr Sagar was not however provided with a copy of the email exchange or any information about the party who had made the enquiry. When Mr Baxter was further questioned on this response at trial, he said that this is a ‘classic situation relating to a mortgagee sale and a buyer of this nature hoping to pick up a bargain … the worse thing we can do is show any sign of weakness’.
I reject any criticism of Savills (or Manda) in this regard; any suggestion that Savills refused to engage with interested parties after the EOI closed, or that the Multifield communication showed that there were other interested parties who would have participated in an extended campaign into 2021, lacks context. Mr Baxter clearly knew the nature of the party who had made the enquiry and judged that it was an opportunistic enquiry aiming at picking up a bargain. Accordingly, he responded as he did to convey that interest at the desired price level had been strong. There is no legitimate basis to second guess such a judgment. Of course, there was nothing to stop Multifield making a late offer in any event (which it did not).
Failure to sufficiently advertise
The defendants argue that the references to ‘mortgagee sale’ in the sales brochure and the sales boards were unduly prominent in colour and font. They submit that this evinced a fixation on the part of Manda with selling the asset quickly and without due regard to the best obtainable price, such as to give rise to a breach by Manda of its common law duty and statutory duty of good faith,[12] as well as a breach of its obligations under s 420A of the Act. The defendants rely upon Mr Sagar’s evidence to the effect that whilst for a highly sought after or prime asset marketing a sale as a mortgagee sale can have the effect of increasing interest and competition in the property and thereby ultimately increasing the sale price, drawing attention to a mortgagee sale for ‘secondary assets’ can have a detrimental impact on price and create the perception of a vendor ‘acting with compulsion’, leading purchasers to believe that the property can be purchased at a discount.
[12]Section 77, Transfer of Land Act 1958 (Vic).
Mr Sutherland agreed that the Property was not a ‘highly sought after commodity’, although he did not share Mr Sagar’s assessment of the significance of that fact in the context of the advertising campaign. Both Mr Baxter and Mr Gross gave evidence that not only was it standard practice for mortgagee sales to be advertised as such, but that such a process was a positive and helped to generate a sale at the best possible price. Mr Czarny, who had considerable experience in his capacity as a director of a Manda, also strongly disagreed with the suggestion that advertising the Property as a mortgagee sale had a deleterious effect on the capacity to achieve a sale at market price.
As Mr Sutherland explained, it is common practice for such properties to be advertised as mortgagee sales, as this indicates the existence of a motivated vendor and suggests that parties expressing interest in the property and undertaking investigations are not wasting their time in dealing with an unrealistic vendor who may simply be testing the market. Mr Sutherland considered that such a means of advertising was particularly appropriate for the Property during the Second Lockdown and broader COVID-19 pandemic, and opined that without a mortgagee sale tag, many in the market might have perceived that a vendor had an elevated view of the Property’s worth. Noting the experience of Mr Sutherland’s firm in sales of properties by mortgagees in possession or sales otherwise flowing from insolvency and related issues, his opinion is of considerable weight. So too is the evidence of Messrs Gross and Baxter whose experience and expertise has been noted above. In my view, the defendants have not established that the manner in which the property was advertised as a mortgagee sale and the prominence given to that fact gave rise to a breach by Manda of s 420A of the Act; or, for that matter, their common law and statutory duties of good faith.
Summary of conclusions
The defendants have not established that Manda failed to take all reasonable care to sell the Property for not less than its market value. Manda engaged experienced agents with demonstrated expertise in the marketing of properties of the same nature as the Property. The emphasis in the advertising campaign on the fact of the mortgagee sale was entirely consistent with usual practice and had obvious commercial advantages. The four week EOI campaign also accorded with usual practice and elicited significant interest in the Property. Further, the competitive tension generated by the marketing campaign was such as to generate a sale of the Property in a difficult and unpredictable market. That sale fell within the range of the agent’s initial expectations and was in fact in excess of a contemporaneous valuation conducted by a qualified valuer shortly prior to settlement.
In the result, the counterclaim shall be dismissed.
There being no other defence to the plaintiff’s claim, there will be judgment for the plaintiff against the defendants. I shall hear the parties as to the amount for which judgment should be entered including interest and as to costs.
SCHEDULE OF PARTIES
| S ECI 2021 02698 | |
| BETWEEN: | |
| MANDA CAPITAL HOLDINGS PTY LTD (ACN 168 795 088) | Plaintiff/Defendant by Counterclaim |
| - v - | |
| PEC PORTFOLIO SPRINGVALE PTY LTD (ACN 617 041 988) | First Defendant/Plaintiff by Counterclaim |
| MARTYN CRAIG BARNES | Second Defendant |
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