MBF Investments Pty Ltd v Nolan

[2011] VSCA 114

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2009 3876

MBF INVESTMENTS PTY LTD (ACN 005 731 957)	Appellant
	v
DAMIEN NOLAN	Respondent

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JUDGES	NEAVE, REDLICH and WEINBERG JJA
WHERE HELD	MELBOURNE
DATE OF HEARING	29 and 30 July 2010
DATE OF JUDGMENT	20 April 2011
MEDIUM NEUTRAL CITATION	[2011] VSCA 114	1st Revision:  25 Nov 2011 [163] & [227]
JUDGMENT APPEALED FROM	Nolan v MBF Investments Pty Ltd [2009] VSC 244 and [2009] VSC 457 (Vickery J)

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MORTGAGES – Statutory power of sale – Transfer of Land Act 1958, s 77(1) – Scope of mortgagee’s duty – Pendlebury v The Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd [1995] NSW Conv R 55-731, considered – Property sub-divided after default – House situated on one lot – Whether mortgagor had ‘home occupation interest’ – Relevance of international instruments to interpretation of statutory duty – Fair market value obtained at auction – Order of sale of lots contrary to wishes of mortgagor – Sale not causative of any loss.

CONTRACT – Construction – Exclusion clause – Deed of settlement – Limitation of duty owed by mortgagee to have regard to particular interest when exercising statutory power of sale – Waiver of any liability arising from exercise of power.

DAMAGES – Breach of duty owed when exercising statutory power of sale – Transfer of Land Act 1958, s 77(4) – Nature of remedy – Measure of loss and damage – Increase in value of properties wrongfully sold.

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Appearances:	Counsel	Solicitors
For the Appellant	Mr R M Garratt QC with Mr L E Hawas	Rigby Cooke Lawyers
For the Respondent	Mr C W R Harrison SC with Mr T J Sowden	Nicholas O’Donohue & Co Lawyers

NEAVE JA

REDLICH JA
WEINBERG JA:

Introduction

1. The appellant, MBF Investments Pty Ltd (‘MBF’), an investment company controlled by the Christian religious order known as the Good Shepherd Sisters, was the mortgagee of property situated at 16-18 Walmer Street, Kew (the ‘property’).  The respondent, Mr Damien Nolan, was the mortgagor of that property, which he held as trustee of a family trust known as the Prudent Trust.  By the time the property came to be sold, it had been subdivided into three lots (hereafter referred to as ‘Lot 1’, ‘Lot 2’ and ‘Lot 3’).  There was a house on Lot 1, in which Mr Nolan had lived with his wife and children for many years.  The other two lots were vacant.

1. Following the mortgagor’s failure to make the payments of interest required by the mortgage, and after giving the required notices,[1] MBF exercised its power of sale by auctioning the three lots on 18 August 2001. Mr Nolan then initiated Supreme Court proceedings claiming damages from MBF for an alleged breach of the duty to sell ‘in good faith and having regard to the interests of the mortgagor’ imposed on it by s 77(1) of the Transfer of Land Act 1958 (the ‘TLA’). The trial judge upheld Mr Nolan’s claim and ordered that MBF pay him $129,046 in damages, together with interest and costs.

   [1]Transfer of Land Act 1958, ss 76 and 77. See also the Memorandum of Common Provisions discussed at [50]-[52] below.

1. MBF now appeals against the decision and orders.  Mr Nolan cross-appeals claiming that he was entitled to damages of $985,191, for the breach of duty owed to him by MBF.[2]

   [2]We refer to various notices of contention below.

Background to the appeal

1. The mortgage to MBF was a first mortgage granted on 15 June 1998, to secure a loan of $975,000.[3]  Under the terms of the mortgage, payments of interest were due on the first day of each month from 15 June 1998 to 1 July 2001, when the principal sum was to be repaid.  The property was also subject to a second mortgage to the Australian and New Zealand Banking Group Ltd (‘ANZ’) registered on 11 July 2000.

   [3]It was registered on 13 November 1998: Nolan v MBF Investments Pty Ltd [2009] V Conv R 54-765 (‘Liability reasons’), [14]. The chronologies supplied by the parties listed this date as being 1 September 2000. Nothing turns on this difference.

1. On 1 May 2000, Mr Nolan defaulted in paying interest to MBF and failed to pay any interest after that date.  As at 30 April 2001, MBF was owed $1,158,473.49 and interest was increasing by approximately $8,000 per month.[4]  As at the same date, approximately $275,000 was owed under the ANZ mortgage.[5]

   [4]Liability reasons, [27].  By 27 July 2001, the amount estimated to be owed to MBF, assuming settlement of the sale or sales occurred on or about 18 November 2001, had increased to $1,531,092.87: see [102] below.

   [5]Liability reasons, [27].

1. In addition to the first mortgage to MBF and the second mortgage to ANZ, the property was also subject to an equitable charge or lien arising out of orders made by Warren J (as her Honour then was).  The charge or lien arose out of a dispute between Mr Nolan and a former business associate, Mr Geoffrey Collie.  Merlaw Nominees Pty Ltd (‘Merlaw’) had previously been the trustee of the Prudent Trust and had been sued, in that capacity, by Mr Collie (the ‘1991 proceeding’).[6]  On 24 November 1999, Mr Collie was awarded damages of $92,784.74 plus interest of $106,052.96 (ie, a total of $198,837.70) and costs.[7]

   [6]Collie v Merlaw Nominees Pty Ltd [1998] VSC 203; Collie v Merlaw Nominees Pty Ltd (No 2) [1999] VSC 84.

   [7]Liability reasons, [20].

1. When Mr Nolan became the trustee of the Prudent Trust in place of Merlaw, Mr Collie commenced a further proceeding seeking subrogation to Merlaw’s right of indemnity (the ‘2001 proceeding’).[8]  On 9 March 2001, Warren J declared that Merlaw was entitled to indemnity out of, and exoneration from, the assets of the trust in respect of the judgment debt in favour of Mr Collie, and that Merlaw had an equitable charge or lien over the assets of the Prudent Trust to that extent.  Her Honour declared that Mr Collie was entitled to be subrogated to Merlaw’s right of indemnity out of the trust assets.  Mr Nolan was also enjoined from dealing with the property.  Warren J ordered that: ‘Until further order the second-named defendant (Nolan) is restrained from dealing with or disposing of any of the assets or property of the Prudent Trust, or taking any action whatsoever as trustee of the Prudent Trust’.

   [8]Collie v Merlaw Nominees Pty Ltd (2001) 37 ACSR 361.

1. As at 16 May 2001, Mr Collie estimated that he was owed an amount in the order of $548,000 by Mr Nolan, comprising $238,000 in respect of the judgment in the 1991 proceeding, taxed costs of $150,000 relating to that proceeding and taxed costs of $160,000 arising out of the 2001 proceeding.[9]

   [9]Liability reasons, [23].  Cf Beach J’s observation in Nolan v MBF Investments Pty Ltd [2001] VSC 175 (at [14]) that ‘Collie claims an interest in the proceeds of the sale of the property to the extent of $586,254’ and that a significant portion of Mr Collie’s claim ‘appear[s] to be quite valid’. According to a spreadsheet prepared on Mr Nolan’s behalf containing his calculations of loss and damage (Exhibit P1), the amount owed to Mr Collie as at 15 November 2001 was $533,382.96.

1. Despite the amounts owed to him and the declarations made in his favour, Mr Collie did not ultimately enforce the judgment debts arising out of the 1991 and 2001 proceedings.  The trial judge in the current case described his entitlement as follows:

At all relevant times, Mr Collie remained merely judgment creditor, with an equitable charge or lien to the extent of his judgment debt over the property and the proceeds of any sale of the property, should a sale occur.  As a result, he never placed himself in a position to force a sale of the property, or any part of it.  His rights to initiate recovery from the property were confined to seeking an order for possession founded on his judgment debt, or directing the Court Sheriff to take that step on his behalf, neither of which were pursued by Mr Collie at any time.[10]

As we explain below, counsel for MBF in the appeal argued that s 77(1) of the TLA required MBF to have regard, inter alia, to Mr Collie’s entitlement in exercising its power of sale.

[10]Liability reasons, [24].

1. After MBF had notified Mr Nolan of its intention to exercise its powers consequent on default (including its power of sale), he proposed to MBF that the land should be subdivided and sold as three separate lots rather than as a single parcel.  Clearly, that was because he considered that the land sold, after subdivision, would be worth considerably more than if sold as a single parcel.  His proposal was rejected by a letter dated 20 October 2000.  On 15 December 2000, by consent, MBF obtained a judgment for possession.  A warrant of possession was issued on 19 December 2000 and on about 12 January 2001, Mr Nolan received a letter from the Sheriff’s Office requiring that the property be vacated by 2 February 2001.

1. Mr Nolan continued, however, to press for subdivision of the land, in order to maximise the amount that would be realised on sale.  The trial judge accepted that the second mortgagee, ANZ, also preferred to have the property subdivided and sold in separate lots for the same reason. 

1. The negotiations which occurred between MBF and Mr Nolan between October 2000 and May 2001 about Mr Nolan’s proposal that the land should be subdivided are set out in the learned judge’s reasons.  For the purposes of these reasons, it is sufficient to note that, on 4 May 2001, Mr Nolan commenced proceedings against MBF seeking injunctions restraining it from selling the property other than in three separate lots, from selling the proposed Lot 1 (ie, the Nolan family residence) less than 30 days after the sale of the proposed Lots 2 and 3 and from enforcing its warrant of possession in relation to Lot 1.  We describe this as the ‘method of sale proceeding’.  Mr Collie was also served with the documents relevant to the method of sale proceeding.

1. At the hearing of Mr Nolan’s application for interlocutory relief, it was submitted on his behalf that the amount that would be realised by sale of Lots 2 and 3 would be sufficient to discharge MBF’s first mortgage, pay the costs of the proposed subdivision and either discharge or significantly reduce the amount owing to ANZ.  MBF was prepared to permit subdivision but did not want any constraints on the method or order of sale.  Mr Collie submitted that the three lots should be sold at auction on the same day.

1. The previous order made by Warren J in the 2001 proceedings between Mr Collie and Merlaw prevented Mr Nolan from entering into an agreement with the City of Boroondara under s 173 of the Planning and Environment Act 1997, which was required before a plan of subdivision could be sealed under that Act.  Beach J, who heard the interlocutory application, varied the order of Warren J to enable Mr Nolan to enter into the s 173 agreement.  In doing so, he said that:

As I intend to vary the order of Warren J to enable Nolan to sign a s 173 agreement, in my opinion there is no basis for the grant of any of the injunctive relief sought by Nolan in his writ and summons.

It is not for this court to direct a mortgagee as to whether it should sell the three allotments on the one day.  As to whether that is done or allotments 2 and 3 are offered for sale on the same day with allotment 1 being offered for sale on a later date, assuming of course that it becomes necessary to do so to discharge MBF’s mortgage, is a matter for MBF to determine.

In making such a determination MBF will be expected to obtain appropriate advice from an experienced real estate agent and then, unless there is very good reason not to do so, to act upon that advice.

…

During the course of the hearing before me there was much debate as to whether I should make orders in favour of Collie the effect of which would be to require MBF to pay to Collie the amount awarded to him by Byrne J in his judgment in proceeding No 6265 of 1991 and further sums to cover the costs awarded in his favour by Byrne J and the costs awarded to him by Warren J on 9 March 2001, neither of which have as yet been taxed.

In my opinion it would be inappropriate for me to make any such orders.  Those matters do not concern MBF.  Collie has his judgments and should execute them in the appropriate fashion.[11]

[11][2001] VSC 175, [26]-[31].

1. After the interlocutory proceedings, Mr Nolan continued to make representations to MBF about the order in which Lots 1, 2 and 3 should be sold.  On 13 June 2001, MBF and Mr Nolan executed a deed under which MBF agreed to delay the proposed sale so that the property could be subdivided (the ‘Deed’).  Mr John Arthur, a friend who had supported Mr Nolan in his attempts to have the land subdivided, and Peter Mulcahy & Associates Pty Ltd (a firm of land surveyors) (‘Mulcahy & Associates’) were also parties to the Deed.  The trial judge described the effect of the Deed as follows:

Pursuant to the Deed, MBF would agree to delay taking possession of and selling the property on the terms set out in the document.  These terms included the provision of $126,555 to MBF to effect the subdivision, the delivery to it of an irrevocable bank guarantee in the sum of $50,000 as a surety to be provided by a friend of Mr Nolan’s, Mr Arthur, and the completion of the subdivision by 20 July 2001.  The Deed also provided for the sale of the property, distribution of the subdivision funds, distribution of the sale proceeds, settlement of the method of sale proceeding, and a release.

…

Mr Collie was not a party to the Deed.  Furthermore, the clause of the Deed dealing with the distribution of the sale proceeds did not include any reference to Mr Collie or his judgment debt.  It did, however, make provision for payment out of the MBF debt, and the ANZ debt, with the balance of the proceeds of sale to be paid to Mr Nolan ‘unless prevented by order of the Court from doing so’.

Following entry into the Deed, on 26 June 2000 a plan of subdivision was issued by the City of Boroondara pursuant to planning permit No BOR/98/01353 for the subdivision of the property into three allotments.[12]

[12]Liability reasons, [59]-[62].

1. Clause 4 of the Deed provided that the method and timing of the sale was to be in the absolute discretion of MBF. In cl 9, Mr Nolan released MBF from liability. The terms and effect of cls 4 and 9 of the Deed are discussed in some detail at [164] to [228] below. For present purposes, it is sufficient to note simply that the trial judge held that the Deed was ineffective in excluding or limiting the obligations imposed upon MBF by s 77(1) of the TLA.[13] As we discuss below, MBF challenges that finding. Mr Nolan has filed a notice of contention asserting that his Honour’s conclusion that s 77(1) was not excluded, could have been supported on the basis that public policy prevented its exclusion, even if that were the effect of the Deed.

   [13]Ibid [64]-[87].

1. Following execution of the Deed, the property was subdivided into a house lot (ie, Lot 1) and two vacant lots (ie, Lots 2 and 3).  MBF then sought advice from various estate agents as to both the most appropriate method of sale, and the order in which the lots should be sold.  The advice which it received is discussed in more detail below.

1. Mr Nolan continued to press his position that the vacant lots (ie, Lots 2 and 3) should be auctioned first and that the house lot (ie, Lot 1) should only be sold if the proceeds of sale of those lots were insufficient to pay out MBF and ANZ.  His friend, Mr Arthur, approached the Provincial of the Good Shepherd nuns on two occasions advising her that if the sale of the property were properly conducted it would be unnecessary to sell the house lot.

1. On the day of the auction, 18 August 2001, it was announced that Lot 2 would be offered for sale first, then Lot 1 and finally Lot 3.  Lot 2 sold for $1.305 million, which was significantly more than the pre-auction offer of $975,000 that had been made for that lot.  The sale price for Lot 2 meant that only slightly more than $230,000 had to be recovered on the sale of Lots 1 and 3 to cover the remainder of MBF’s debt.  Mr Nolan approached the real estate agents at the auction and requested that the previously announced order of sale be altered, so that instead of selling the house lot next, Lot 3 would be sold instead.  Had that approach had been followed, it would only have been necessary to sell Lot 1 if the sale of Lot 3 had fallen through, or had not realised a sufficient amount to cover the balance of MBF’s debt.  (Any retained lot would have provided sufficient security for ANZ’s debt.)

1. MBF’s solicitor, Mr Macnish, advised against altering the previously decided order of sale.  Accordingly, the house lot was sold immediately after Lot 2.  The sale of Lot 1 realised $915,000, so that the purchase price of the two lots combined produced a considerable surplus over the total amount owing to MBF.  Once that became clear, Mr Nolan asked that Lot 3 (ie, the other vacant lot) be auctioned.  Lot 3 was passed in, but then sold to one of the bidders for $690,000.

1. Following these events, Mr Nolan commenced proceedings against MBF in the trial division of the Supreme Court, seeking damages for what he alleged had been an improper exercise by MBF of its power of sale.

1. In broad terms, the trial judge held that:

(a) Mr Nolan had a ‘home occupation interest’ in Lot 1, where he and his family had lived for many years. The duty of a mortgagee under s 77(1) of the TLA to ‘have regard to the interests of the mortgagor’, was not limited to ensuring that the mortgagee takes appropriate steps to obtain the best price on sale of the property, consistent with the mortgagee’s security entitlement, but required MBF to have regard to that ‘home occupation interest’;

(b)      the terms of the Deed between MBF and Mr Nolan did not modify or extinguish MBF’s duty;

(c) MBF’s failure to auction Lot 3 before auctioning Lot 1, after Lot 2 had realised the sum of $1.305 million, had constituted a breach of its duty, owed to Mr Nolan, to act in good faith and to have regard to the interests of the mortgagor. Although MBF also owed a duty under s 77(1) to other persons with security interests in the property, that duty would not have been breached by altering the order of sale, as requested. MBF was not required by s 77(1) to have regard to Mr Collie’s interest in the property, such as it was. Even if MBF were required to take that interest into account, Mr Nolan could easily have raised a sufficient loan on the security of the retained Lot 1 to pay out Mr Collie’s interest completely; and

(d)      the loss caused by MBF’s breach of duty amounted to $129,046 plus interest.

1. His Honour’s reasoning in support of each of these conclusions is discussed in more detail below.

The issues arising on the appeal and cross-appeal

1. Although MBF relied on 21 grounds of appeal and Mr Nolan on eight grounds of cross-appeal, the questions for determination can be conveniently summarised as follows:[14]

   [14]In framing these questions, we have taken account of the six contentions put forward in the appellant’s outline of submissions.

(a) is the scope of the mortgagee’s duty under s 77(1) of the TLA to sell in good faith and having regard to the interests of the mortgagor limited to taking reasonable steps to obtain the best price for the property? Does it require a mortgagee to have regard to a ‘home occupation interest’? (Grounds of appeal 1, 2(a)(ii), 3 and 4(b) and (c))

(b) having regard to the advice which MBF received both prior to and during the course of the auction, did MBF breach the duty it owed to Mr Nolan under s 77(1) (Grounds of appeal 5 to 14) and the duty it owed to other persons? (Grounds of appeal 2 (a)(i), 2(b), 4(a),(d)) and (e), 15 and 16, which relate to Mr Collie’s equitable lien)

(c)       did the Deed made between (inter alia) MBF and Mr Nolan exclude or limit any duty MBF might otherwise have had to have regard to Mr Nolan’s ‘home occupation interest’?  (Grounds of appeal 17, 18 and 19 and notice of contention)

(d)      did the trial judge err in assessing the quantum of damages suffered by Mr Nolan?  (Grounds of appeal, 20 and 21 and grounds of cross-appeal 1 to 8).

1. Where it is necessary to provide greater detail of particular grounds of appeal they are set out below.

The Scope of the Mortgagee’s Duty

Does s 77(1) require a mortgagee to have regard to a mortgagor’s ‘home occupation interest’?

1. Section 77(1) of the TLA provides as follows:

If within one month after the service of such notice or demand[15] or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by instalments, subject to such terms and conditions as the mortgagee or annuitant thinks fit ...[16]

[15]This refers to the notice or demand referred to by TLA, s 76.

[16]It is unnecessary to set out the remainder of the section.

1. The central issue in the proceedings below concerned the scope of the duty owed by MBF to Mr Nolan under s 77(1). That issue was whether MBF breached that duty, by selling Lot 1 immediately after the sale of Lot 2, when it had already recovered most of the debt secured by its first mortgage by selling Lot 2 and, as matters eventuated, would have recovered the balance of its debt, if it had sold Lot 3 next.[17]  We turn first to that issue.

   [17]Liability reasons, [5]-[7].

The judge’s findings

1. In a careful and comprehensive judgment, the trial judge found that Mr Nolan had what he described as a ‘home occupation interest’ in Lot 1.  His Honour’s conclusion was based largely on the fact that Mr Nolan, as a Torrens system mortgagor, had a fee simple interest in the property and a contractual right to occupy it, together with an equitable right to have the mortgage discharged on repayment of the debt:

Included in the ‘bundle of rights’ the mortgagor had in this case, was his right to occupy the dwelling on the Lot 1 property as his residence.  Under the terms of the MBF mortgage, Mr Nolan had a contractual right as the mortgagor to remain in possession of the mortgaged property until possession was granted to the mortgagee following default.  Thereafter, he was entitled to remain in occupation with the mortgagee’s consent until he was directed to quit the property.  Until the property was sold, and while he continued to occupy the land with the permission of the mortgagee, Mr Nolan had all the rights that ownership of an estate in fee simple carried with it, including the full use and enjoyment of the property, within the bounds of the law.

Upon discharge of the mortgage, Mr Nolan was entitled to continue in possession by virtue of his interest in the land as owner of an unencumbered estate in fee simple.[18]

[18]Ibid [133]-[134].

1. The trial judge further reasoned that Mr Nolan had a right of ‘home occupation’ because the use of Lot 1 as a home was ‘an as of right use of the land without need for a planning permit’ under the Boroondara Planning Scheme.[19] The distinction between land used as a home and land used for other purposes was recognised by s 100 of the Planning and Environment Act 1987, which requires greater compensation to be paid when land occupied as a residence is acquired for public purposes.  No such right arose in relation to the vacant lots, which were not used for shelter.  According to his Honour, Mr Nolan’s ‘home occupation interest’ in Lot 1 was obvious to any objective observer, and must therefore have been obvious to MBF as well.[20]

   [19]Ibid [135]. See Boroondara Planning Scheme, cls 31, 32.

   [20]Liability reasons, [135]-[137].

1. The trial judge held that neither the language of s 77(1) of the TLA, nor the authorities on the extent of a mortgagee’s duty in exercising its power of sale,[21] confined the mortgagor’s interest to an interest in ‘obtaining the best price for the property consistent with the mortgagee’s entitlement to realize its security’.[22]  His Honour said:

Section 77(1) is itself a facilitative provision the purpose of which is to provide a statutory scheme to enable [the] mortgagee to realize its mortgage security consistently with the terms of the section. The requirement for the mortgagee to exercise good faith in carrying out the statutory power of sale is a reflection of the general law. The requirement that in addition, the mortgagee is to have ‘regard to the interests of the mortgagor’ and other persons, is designed to provide a further measure of protection to the mortgagor on the one hand, and impose a further measure of responsibility on the mortgagee in the exercise of its power …

The section as it is drafted, and as it has been properly interpreted, in my opinion reflects a purpose or object to provide a reasonable measure of protection to a mortgagor, consistently with the right of the mortgagee to realize its security.  The provision is designed as a protective counterbalance to the otherwise unfettered power of the mortgagee upon a sale of the mortgaged property.

… a construction of s 77(1) which ascribes to the word ‘interests’ in the sub‑section a meaning which includes the home occupation interest of the mortgagor, is more consistent with the promotion of the purpose or object of the section than not.[23]

[21]His Honour referred to Forsyth v Blundell (1973) 129 CLR 477; Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309; Goldcel Nominees Pty Ltd v Network Finance Ltd [1983] 2 VR 257; Vasiliou v Westpac Banking Corporation (2007) 19 VR 229; Barns v Queensland National Bank Ltd (1906) 3 CLR 925.

[22]Liability reasons, [95].

[23]Ibid [108]-[110].

1. His Honour held that s 32 of the Charter of Human Rights and Responsibilities Act 2006 (the ‘Charter’), which provides that ‘[s]o far as is possible to do so consistently with their purpose, all statutory provisions must be interpreted in a way that is compatible with human rights’, was not applicable to these proceedings.[24]  That conclusion was clearly correct and was not challenged on appeal.[25] Thus s 13 of the Charter, which provides that:

   [24]Ibid [175]-[177].

   [25]Section 2 of the Charter provides that, except for divs 3 and 4 of pt 3, the Charter comes into operation on 1 January 2007. Divisions 3 and 4, which contain provisions relating to the applicability of the Charter and the interpretation of laws, came into operation on 1 January 2008. The auction took place on 18 August 2001.

A person has the right –

(a)not to have his or her privacy, family, home … unlawfully or arbitrarily interfered with

…

was inapplicable.

1. The trial judge then referred to the principle that Parliament should not be taken to legislate inconsistently with the obligations imposed by international law. That principle permitted the terms of international conventions to be used to resolve any ambiguity in s 77(1).[26]  Although treaties and conventions bound state parties, rather than private parties, they imposed positive obligations on state parties to take measures to enable the full enjoyment of human rights:

Accordingly, the fact that the alleged violation of the fundamental human right to protection against arbitrary interference with a person’s home in this case was not perpetrated by an agency of the state, was no bar to ensuring that the right is adequately protected by domestic legislation from infringing conduct on the part of private actors.[27]

[26]Minister for Foreign Affairs and Trade v Magno (1992) 37 FCR 298, 304 (Gummow J); Royal Women’s Hospital v Medical Practitioners Board of Victoria (2006) 15 VR 22, 38-9 (Maxwell P).

[27]Liability reasons, [165].

1. His Honour said that, having regard to international instruments which prohibit arbitrary interference with a person’s right to their home,[28] it should therefore be presumed that Parliament would not have intended to overthrow a right of ‘home occupation’ without stating that intention with ‘irresistible clearness’.[29]

   [28]He referred to art 12 of the Universal Declaration of Rights; The International Covenant on Civil and Political Rights, opened for signature 16 December 1966, 999 UNTS 171 (entered into force 23 March 1976); The International Covenant on Economic, Social and Cultural Rights, opened for signature 16 December 1966, 993 UNTS 3 (entered into force 3 January 1976); Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213 UNTS 222 (entered into force 3 September 1953), art 8.  Reference was also made to a number of cases decided under these provisions.

   [29]Liability reasons, [181], citing Gleeson CJ in Electrolux Home Products Pty Ltd v Australian Workers’ Union (2004) 221 CLR 309, 329.

1. His Honour’s conclusion was that:

applying the principle of legality necessarily involves construing the general word ‘interests’ as it appears in s 77(1) TLA in a manner which does not curtail the fundamental human right of protection of a person’s home from arbitrary interference.

To approach the matter otherwise, would result in an unintended curtailment of the right. In circumstances where the mortgagee is presented with a clear choice as to whether to proceed with the sale of the mortgagor’s home or some other property to realize its debt, if the mortgagor was to have no relevant ‘interest’ in his home within the meaning of s 77(1) TLA, the way would be opened for the mortgagee to act in an arbitrary manner in making its choice. Such a construction of the section would render the fundamental human right ineffective in this circumstance. It would have no sphere of operation in the context of a mortgagee’s sale in Victoria. An adverse consequence of this kind is not intended by the legislation.[30]

[30]Liability reasons, [183]-[184].

1. His Honour held that:

MBF completely disregarded Mr Nolan’s interest in the property, namely his right to redemption which, if exercised as it would have been on the sale of Lots 2 and 3, would have resulted in him retaining Lot 1 as an unencumbered estate in fee simple.  Further, the use and enjoyment of the dwelling house situated on Lot 1 for home occupation, which had been so assiduously brought to the attention of MBF over the months preceding the auction sale, was lost.

In the words of Isaacs J in his judgment in Pendlebury v Colonial Mutual Life Assurance Society Limited[31] of more than 100 years ago:

‘I can see no escape from the conclusion that the mortgagees did not exercise the power of sale in good faith, because the society sold the mortgagor’s land without the smallest regard for his interests.  He had no real chance whatever to save a plank from the wreck, his very existence was ignored, and his land and improvements and labour were sacrificed without the least sense of obligation to him, though a comparatively small effort was necessary to prevent the disaster, and though, as the respondent society must have recognized, if it even gave the matter a thought, the property itself contained the amplest and safest means of preservation.’

This statement is prophetically apt to describe the facts of the present case.

In a like manner, and regrettably, MBF recklessly dealt with the property in a way which sacrificed the interests of the mortgagor. The decision of MBF taken on 18 August 2001 to sell Lot 1 at the auction was not made in good faith, having regard to the relevant ‘interest’ of the mortgagor pursuant to s 77(1) TLA. The conduct was also manifestly unreasonable. It was not founded on the evidence available nor was it founded on principle. It amounted to an arbitrary interference of the most serious kind with Mr Nolan’s right to continue in occupation of his home.[32]

[31](1912) 13 CLR 676.

[32]Liability reasons, [287]-[289].

1. We now turn to the submissions relating to the scope of the mortgagee’s duty.  The grounds of appeal relating to his Honour’s finding that MBF breached its duty are discussed later in these reasons.

The parties’ submissions

1. MBF’s primary submission was that:

The home occupation interest of the Respondent (‘Nolan’) in Lot 1 of the property at 16-18 Walmer Street, Kew (‘the Property’) was not a relevant interest to which MBF was required to have regard under s 77(1) of the Transfer of Land Act 1958 (‘the TLA’) when exercising a power of sale. MBF was only required to protect Nolan’s interest in the proceeds of sale by obtaining the best price for the Property.

1. MBF submitted that it was not obliged to have regard to such an interest in exercising its power of sale, for three main reasons.  First, it was impossible to reconcile any ‘home occupation interest’ (extending beyond the mortgagor’s legitimate interest in obtaining the best price for the property when sold) with the entitlement of the mortgagee not merely to recover its own loan, but also with its duty to have regard to the interests of any subsequent security holders.[33]  The mortgagee’s obligation to have regard to the interests of both the mortgagor and other security holders was said to extend only so far as was consistent with the mortgagee’s own interests.[34]

   [33]Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309, 313; Kravchenko v The Rock Building Society [2010] ANZ ConvR 10-005, 59. T 19.

   [34]Vasiliou v Westpac Banking Corporation (2007) 19 VR 229, 242.

1. Secondly,[35] there was no authority which supported the existence of a ‘home occupation interest’, still less one of a kind that would be afforded the additional protection that his Honour had found to exist under s 77(1).

   [35]Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309, 313; Kravchenko v The Rock Building Society [2010] ANZ ConvR 10-005, 59. T 19.

1. His Honour had incorrectly said[36] that Mr Nolan had a possessory interest at the date of auction, because he was the registered proprietor of the land.  Instead, his possessory interest derived from a licence granted to him by MBF in June 2001, when he entered into the Deed.

   [36]Liability reasons, [128].

1. MBF further submitted that the object of s 77(1) is to regulate the exercise of the power of sale in the interests of all parties affected by the power, and not, as his Honour had held, to provide ‘a protective counterbalance to the otherwise unfettered power of the mortgagee upon a sale of the mortgaged property to protect against an abuse of the power of sale’.[37] Section 77(1) was said to impose a duty on the mortgagee to use an appropriate sale process, rather than a duty to obtain the best available price on sale, which was merely the by-product of a properly conducted sale. Obtaining the best price was, however, often, if not always, the only way a mortgagee could realise its security, whilst having appropriate regard to the interests of the mortgagor and other persons under s 77(1).[38]

   [37]Ibid [109].

   [38]Goldcel Nominees Pty Ltd (Provisional Liquidator Appointed) v Network Finance Ltd [1983] 2 VR 257, 261.

1. Thirdly, MBF submitted that it was the potential effect that any improper sale could have on a mortgagor’s and second mortgagee’s interest in the proceeds of sale that justified their protection under s 77(1). The extension of the scope of interests protected under that section, beyond the relevant party’s proprietary interest in the proceeds of the property’s sale, would be contrary to established principle.

1. In reply, it was submitted on behalf of Mr Nolan that the mortgagor’s ‘interests’ were not defined in the TLA and that the trial judge had been entitled to find that those interests included a ‘home occupation interest’ of the kind his Honour had found to exist.[39] The mortgagee’s duty under s 77(1) was not necessarily fulfilled in every case where property was sold at full value. An interpretation of s 77(1) which required the mortgagee to have regard to a ‘home occupation interest’ was consistent with the stated purpose of the TLA[40] and with domestic and international human rights obligations,[41] and was not inconsistent with relevant case law.

   [39]Counsel characterised the term ‘home occupation interest’ as merely being a descriptor.

   [40]Liability reasons, [107]-[110].

   [41]Ibid [150]-[184].

1. Counsel submitted that a reading down of the expression ‘interests of the mortgagor grantor or other persons,’ would be inconsistent with the equitable antecedents of the Torrens system and the historical protection which equity provided to the mortgagor’s right to redeem the mortgaged property.[42]  Counsel submitted that these equitable principles continued to have relevance to the mortgagor’s right to redeem under the Torrens system.[43]  Further, counsel submitted that MBF had advanced no public policy reason in support of its contention that the term ‘interests’, as applied to the mortgagor, included the proceeds of sale only, and did not extend to other components of the ‘bundle of rights’ normally regarded as held by the mortgagor.

   [42]Counsel cited, as an example, the rule against clogs on the equity of redemption: P Devonshire, ‘The Modern Application of the Rule Against Clogs on the Equity of Redemption’ (1997) 5 Australian Property Law Journal 21.

   [43]Liability reasons, [114]-[123].

1. Counsel for Mr Nolan conceded that a mortgagee, in realising its security, is entitled to prefer its own interests to those to which it is required to have regard under the TLA. However, it was submitted that the critical issue in this case was whether the interests of MBF and Mr Nolan were able to be reconciled; that is, whether MBF could have safeguarded its own interests and realised its security, without selling Lot 1. In this case, MBF’s interests could have been served in a way that was compatible with both the interests of Mr Nolan and those of ANZ. In other words, MBF could have realised its security without selling Lot 1,[44] and without breaching its duty to ANZ, as ANZ was fully protected without Lot 1 having to be sold.[45]

   [44]Ibid [283].

   [45]Ibid [231].

1. Mr Nolan drew an analogy with the sale of a hypothetical dairy farm separated over five lots, with the dairy and the associated equipment located on one lot, and the other four lots being used for grazing, where the proceeds of sale of any two of the lots would be sufficient to satisfy the debt owed to the mortgagee.  He submitted that it would be contrary to principle if the mortgagee were able to sell the dairy lot and a single grazing lot, and thereby destroy the viability of the farm, instead of being limited to selling two of the grazing lots.

Conclusion on the scope of the mortgagee’s duty under s 77(1)

1. A mortgagee owes certain duties to a mortgagor when it seeks to exercise its rights over its  security.  Common law and equity alike have set bounds to the extent to which the mortgagee can look after itself and ignore the mortgagor’s interests.  In the exercise of its rights over its security, the mortgagee must act fairly towards the mortgagor.[46]  The mortgagee’s interest in the property has priority over the interest of the mortgagor so that it can protect its own interest.  But it is not entitled to conduct itself in a way which unfairly prejudices the mortgagor.  Two settled examples of where the law imposes a duty on a mortgagee are where it lets the property and must claim a proper market rent, and where it sells and must take appropriate steps to obtain a proper market price.  The issue which here falls for consideration is the ambit of the mortgagee’s duty in the exercise of its powers of sale.

   [46]Palk v Mortgage Services Funding Plc [1993] Ch 331, 337 (Sir Donald Nicholls VC).

(a) Did Mr Nolan have a ‘home occupation interest’?

1. We begin by considering whether the trial judge correctly found that Mr Nolan had a ‘home occupation interest’ in Lot 1, to which MBF was required to have regard under s 77(1) in exercising its power of sale.

1. It is trite law that, unlike a mortgagor of general law land, a person who grants a registered mortgage over Torrens system land retains his/her legal interest in the land, whilst the mortgagee acquires a statutory security interest. Although a fee simple interest carries with it a right to remain in possession (unless the owner has leased the land to a third party), a Torrens system mortgagor’s right to possession may be affected by the terms of the mortgage and is, in any case, qualified by s 81 of the TLA.[47]

[47]Under a general law mortgage, a mortgagee has an immediate right to possession of the land, but this is rarely exercised because a mortgagee is not only liable for rents and profits actually received, but for those which should have been received.  The right to possession was often qualified by an attornment clause of the kind described below.

1. It is useful, in that regard, to consider the standard form Torrens system mortgage. Section 91A(1) of the TLA provides for the lodgement with the Registrar of a memorandum in the approved form containing one or more provisions which are intended for inclusion in instruments to be subsequently lodged for registration. Section 91A(4) provides that a memorandum retained by the Registrar pursuant to that section shall, for all relevant purposes, be deemed to be part of the Register. The memorandum in question is described as the ‘Memorandum of Common Provisions’ (the ‘MCP’).

1. Clause 24(1) of the MCP provides that the mortgagor ‘attorns to and becomes tenant of the mortgagee from week to week at a rental equal to the amount of interest payable’.  The clause is commonly described as an ‘attornment clause’.  Clause 24(1) did not prevent MBF terminating the weekly tenancy at any time, without any default on Mr Nolan’s part.  However, cl 24(2) appears to limit MBF’s right to terminate the ‘tenancy’ and take possession to the case where Mr Nolan has defaulted.  It provides as follows:

Nothing in this clause shall prevent the Mortgagee immediately (and whether or not any demand has been made for payment if the default[48] is in due payment of money) –

(a)       from entering on and taking possession of the land;[49]

…

[48]This appears to be a reference to cl 5, which sets out the rights of the mortgagee on default by the mortgagor. It was not argued that cl 24 was ineffective, because it was inconsistent with the notice provisions of the TLA.

[49]A notice may nevertheless be required to determine the tenancy: see C Croft and J Johannsson, The Mortgagee’s Power of Sale (2^nd ed, 2004) [5.3], though this may only be the case where the attornment clause provides for service of a notice to quit.

1. The apparent purpose of cl 24(2) is to confer an immediate right to possession on the mortgagee if there is a default, including a default in the payment of money.  Clause 5 of the MCP provides that, after a default lasting seven days,[50] the mortgagee has the right to take possession of the land.  A power to sell the land arises seven days after service of the notice of default.[51]

   [50]Section 76 of the TLA permits the one month period for which the default must continue to be shortened by the mortgage.

   [51]Clause 5 purports to shorten the period of one month specified in s 77 of the TLA to seven days.

1. During the course of argument, the trial judge was referred to the decision of the English Court of Appeal in Jarrett v Barclays BankLtd,[52] which concerned the exercise of a mortgagee’s powers of sale under the Courts (Emergency Powers) Rules 1943 (UK). His Honour correctly held that that decision threw no light on the meaning of s 77(1). However, in the course of distinguishing the judgment, his Honour commented that:

It may be readily accepted that a tenant of mortgaged property does not have sufficient interest in the property or the proceeds of sale requiring a mortgagee to have regard to his interests.  The interests of a tenant are possessory only.  A mortgagee exercising a power of sale is not required to have regard to the interests of a party whose interest in the property is merely possessory.[53]

This, however, is not the present case.  Mr Nolan held an estate in fee simple, subject to the MBF mortgage and the ANZ mortgage.  His possessory rights sprang from his proprietary interest in the land and the terms of his mortgages.  His interest was not merely a possessory interest.[54]

[52][1947] Ch 187 (CA).

[53]That is not the case where the lease was granted prior to the mortgage or the lease was granted with the consent of the mortgagee.

[54]Liability reasons, [127]-[128].

1. The distinction which the trial judge drew between a registered mortgagee of TLA land and a lessee of such land which is mortgaged failed, with respect, to take into account the effect of the attornment clause, which made the mortgagor the weekly tenant of the mortgagee, such tenancy continuing until default.

1. Further, at the time of the auction, MBF had served notices giving rise to the power of sale and a judgment for possession had been entered by consent.  On 19 December 2000, MBF issued a warrant for possession.  On 12 January 2001, Mr Nolan had received a letter from the Sheriff’s Office requiring him and his family to vacate the property by 2 February 2001.  As from 13 June 2001, he occupied the premises pursuant to the terms of the Deed, under which MBF agreed to instruct the sheriff to delay execution of the warrant of possession.[55]  The Deed also provided that Mr Nolan would vacate the premises upon being served with a notice by MBF:

   [55]Clauses 3.1, 3.2.

3.3Nolan and Arthur agree and guarantee to MBF that Nolan will vacate and hand possession of the security in good order to MBF no later then [sic] 7 days after MBF serves notice (‘the notice’) on Nolan to vacate the security, such notice to be served by letter containing the words to that effect transmitted to facsimile number …

…

3.5Nolan and Arthur acknowledge and agree that service of the notice will be at MBF’s absolute discretion and no reason need or will be given by MBF to Nolan or Arthur for the service of the notice.

Accordingly, Mr Nolan occupied the premises under a licence from MBF, rather than as a mortgagor entitled to possession under the mortgage deed.

1. Even if no judgment for possession against Mr Nolan had been obtained by MBF, s 81(1) of the TLA also restricted his right to possession of the land. Section 81(1) provides that the

first mortgagee shall … have the same rights and remedies at law and in equity as he would have had if the legal estate in the mortgaged land had been vested in him as mortgagee with a right in the mortgagor of quiet enjoyment until default in payment of any principal or interest or a breach in the performance or observance of some covenant.[56]  [emphasis added]

[56]See also s 78.  For discussion of these provisions see C Croft and J Johannsson, The Mortgagee’s Power of Sale (2^nd ed, 2004) [4.15].

1. Since Mr Nolan was in default under the mortgage, he could not rely on the right of quiet enjoyment recognised by s 81. Accordingly, his ‘bundle of rights’ gave him no right of possession of the land as against MBF, which could have withdrawn its licence to him and his family to occupy the premises in accordance with the terms contained in the Deed.

1. Nor do we consider that the location of the property within a ‘Residential 1 Zone’ under the Boroondara Planning Scheme, determined the nature of Mr Nolan’s interests for the purposes of s 77(1) of the TLA.  The zoning of Lot 1 simply meant that Mr Nolan had not breached the Boroondara Planning Scheme by using that lot as his residence. It did not affect his rights as against MBF, which were determined by the terms of the mortgage, the relevant provisions of the TLA and general equitable principles.

1. In their authoritative work on securities law, Professors Edward Sykes and Sally Walker pointed out that, notwithstanding the difference between general law and Torrens system mortgages,

when one takes into account on the one hand the equitable transformation of the [general law] mortgage and on the other hand the statutory and other provisions applicable to the Torrens mortgage which are borrowings from ideas evolved in connection with the old title mortgage, the gap between the two is much lessened.[57]

[57]E Sykes and S Walker, The Law of Securities (5^th ed, 1993) (‘Sykes’) 223.

1. Further: ‘the legislature in engrafting the power of sale on to the Torrens title mortgage did so with all the equitable raiment appropriate to such power in its general law setting.  This is affirmed by the phraseology of the Victorian Act …’.[58]

   [58]Ibid 276.

1. The trial judge correctly referred to those equitable principles for the purpose of determining the nature of Mr Nolan’s ‘bundle of rights’ in the mortgaged property.  His Honour said:[59]

There is another important component of the [mortgagor’s] right which also has its source in equity.  After the mortgagee has taken possession of the property following a default, but prior to the exercise of the power of sale, the mortgagor is in a position to restrain the sale by court order provided he pays into court or to the mortgagee the amount of the mortgage debt, or if this is disputed, the amount claimed by the mortgagee to be due for principal, interest, costs and expenses of the sale.[60]  As Herring CJ said in Re Forrest Trust:[61]

Express provision might, of course, be made for a contractual right to redeem in the contractual part of a mortgage under the Act and possibly such a right might be said to exist by implication, where repayment took place on the day appointed for payment by the covenant to repay on the mortgagor’s part.  But after the time fixed for payment has passed, after, in other words, the mortgagor is in default, a right to redeem does undoubtedly exist ...

And it would be to a Court of Equity that a mortgagor would have to turn to recover possession from a mortgagee who had entered into possession, upon default by the mortgagor, in the exercise of the statutory right to take possession conferred upon him by the Act.  For this right in the mortgagee would defeat any proceedings at law, based upon the mortgagor’s legal title, for the recovery of possession.  And equity, for its part, could only come to the assistance of the mortgagor in default upon his fulfilling his obligations under the mortgage.  It could not compel the mortgagee to sign and hand over a memorandum of discharge or to deliver up possession except upon payment by the mortgagor of all the money due by him to the mortgagee.

[59]Liability reasons, [120].

[60]Inglis v Commonwealth Trading Bank of Australia [1972] 126 CLR 161, 164 (Walsh J); Allfox Building Pty Ltd v Bank of Melbourne Ltd [1993] ANZ ConvR 380.

[61]Re Forrest Trust; Trustees Executors and Agency Co Ltd v Anson [1953] VLR 246, 256-7.

1. It is clear that Mr Nolan had an equitable right ‘to have the land restored’ if he repaid the debt.[62]  He could have prevented the sale from proceeding if he had taken the steps described by his Honour.  But that right is not a right of home occupation of the kind found to exist by the trial judge.  The right of ‘restoration’ on payment applies to all mortgaged property and is not confined to property used for a home.  Further, the exercise of the right depends on the mortgagor being able to repay the amount owing to the mortgagee or into court.  It had no relevance to Mr Nolan’s claim unless he paid the amount then owing to MBF.

   [62]Latec Investments Ltd v Hotel Terrigal Pty Ltd(in liq) (1963) 113 CLR 265; Sandgate Corporation Pty Ltd (in liq) v Ionnou Nominees Pty Ltd (2000) 22 WAR 172, 184 (Steytler J).

1. In our view therefore his Honour incorrectly held that, at the time when the land was auctioned, Mr Nolan had a right to remain in possession of the land as against the mortgagee. Such a right did not exist under equitable principles and was inconsistent with the terms of the mortgage and with s 81 of the TLA.

1. Mr Nolan did not have a ‘home occupation right’ of the kind identified by his Honour. However, the judge also held that MBF’s decision to sell Lot 1, after Lot 2 had realised more than the predicted sale price, ‘was not made in good faith’ as required by s 77(1) and that its conduct in doing so was ‘manifestly unreasonable’.[63] MBF challenged that conclusion. It is therefore necessary to consider the nature of the mortgagee’s duty under s 77(1) and whether MBF was required to sell the lots in the order favoured by Mr Nolan.

   [63]Liability reasons, [289].

(b) The nature of mortgagee’s duty under s 77(1)

1. Cases which consider the mortgagee’s duty under s 77(1) are generally concerned with mortgagor’s claims that the property was sold at an under-value. As his Honour observed, the question whether a mortgagee may be required to sell lots in a particular order is a novel one. Nevertheless, the cases relating to sales at an under-value are instructive in determining the nature of the mortgagee’s duty under s 77(1). The words of s 77(1) must be interpreted against the background of the equitable principles which control the exercise of a mortgagee’s power of sale. Historically, the only duty imposed on a mortgagee exercising the power of sale was to act in good faith.[64]  In their book, The Mortgagee’s Power of Sale,[65] Croft[66] and Johannsson describe that duty as follows:

   [64]Kennedy v De Trafford [1896] 1 Ch 762.

   [65]C Croft and J Johannsson, The Mortgagee’s Power of Sale (2^nd ed, 2004) (‘Croft and Johannsson’) [7.4], [7.32]-[7.33].

   [66]Now Croft J.

The power of sale is conferred to enable the mortgagee to realise his or her debt and, in so doing the mortgagee is, subject to restraints imposed by law for the protection of the mortgagor, entitled to look after his or her own interests in exercising the power.[67]  The courts have consistently refused to interfere with the mortgagee’s exercise of the power in the absence of proof of lack of good faith.[68]  The mere fact that the power has been exercised for some collateral advantage to the mortgagee or has been sold at an undervalue has been held not of itself to be evidence of lack of good faith as will justify the court’s intervention.

The freedom which the courts allowed a mortgagee is illustrated by the following statement of Sir George Jessel MR in Nash v Eads[69] which was quoted as authority by Russell J in Belton v Bass, Ratcliffe and Gretton Ltd:[70]

The mortgagee was not a trustee of the power of sale for the mortgagor, and if he was entitled to exercise the power, the court would not look into his motives for so doing.  If he had a right to sell on 1 June, and he then said, ‘The mortgagor is a member of an old county family, and I don’t wish to turn him out of his property, and will not sell it at present’, and then on 1 July he said, ‘I have had a quarrel with the mortgagor, and he has insulted me; I will show him no more mercy, but will sell him up at once’ – if all this was proved, the court could not restrain the mortgagee from exercising his power of sale, except on the terms of payment of the mortgage debt.  The court could not look at the mortgagee’s motives for exercising his power … He, like a pledge, must conduct the sale properly, and must sell at a fair value, and he could not sell to himself.  But he was not bound to abstain from selling because he was not in urgent need of money, or because he had a spite against the mortgagor.

However, there is authority that the exercise of the power of sale will be considered improper if exercised not for the purpose of recovering the money secured but for some indirect purpose.[71]

[67]See Warner v Jacob (1882) 20 Ch D 200, 234; Farrar v Farrars Ltd (1888) 40 Ch D 395 (CA), 398; Palmer v Barclays Bank Ltd (1971) 23 P & CR 30; Lake Apartments Ltd v Bootwala (1973) 37 DLR (3d) 523; Forsyth v Blundell (1973) 129 CLR 477, 483, 494; Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309, 313.

[68]Kennedy v De Trafford [1896] 1 Ch 762, 772.

[69](1880) 25 Sol Jo 95 (CA).

[70][1922] 2 Ch 449, 465-6.

[71]Robertson v Norris (1858) 1 Giff 421, 424; approved by Cotton LJ in Pooley’s Trustee v Whetham (1886) 33 Ch D 111 (CA), 123; see also Croft and Johannsson, [4.1].

1. Early Australian cases also confined the mortgagee’s duty to the equitable obligation to act in good faith.  In Pendlebury v The Colonial Mutual Life Assurance Society Ltd,[72] Griffiths CJ described the mortgagee’s duty as follows:

The obligations of a mortgagee who sells the mortgaged property were considered by this Court in the case of Barns v Queensland National Bank,[73] in which the rule laid down by Lord Herschell LC, in the case of Kennedy v De Trafford[74] was stated and applied.  The learned Lord Chancellor said, in the course of his speech:[75] ‘My Lords, I am myself disposed to think that if a mortgagee in exercising his power of sale exercises it in good faith, without any intention of dealing unfairly by his mortgagor, it would be very difficult indeed, if not impossible, to establish that he had been guilty of any breach of duty towards the mortgagor’.  Lindley LJ, in the Court below, says that ‘it is not right or proper or legal for him either fraudulently or wilfully or recklessly to sacrifice the property of the mortgagor’.  Well, I think that is all covered really by his exercising the power committed to him in good faith.  It is very difficult to define exhaustively all that would be included in the words ‘good faith’, but I think it would be unreasonable to require the mortgagee to do more than exercise his power of sale in that fashion.  Of course, if he wilfully and recklessly deals with the property in such a manner that the interests of the mortgagor are sacrificed, I should say that he had not been exercising his power of sale in good faith.

I understand Lord Herschell to mean that the mortgagee must not recklessly or wilfully sacrifice the interests of the mortgagor, and that if he does he is to be regarded as not having acted in good faith.[76]

[72](1912) 13 CLR 676 (‘Pendlebury’).

[73][1906] 3 CLR 925.

[74](1897) AC 180.

[75]Ibid 185.

[76](1912) 13 CLR 676, 679-80.

1. Barton J[77] referred to the judgment of Lindley LJ in Farrar v Farrars Ltd[78] in which his Lordship said:

Every mortgage confers upon the mortgagee the right to realize his security and to find a purchaser if he can, and if in exercise of his power he acts bona fide and takes reasonable precautions to obtain a proper price, the mortgagor has no redress, even although more might have been obtained for the property if the sale had been postponed.[79]

[77]Ibid 694.

[78](1888) 40 Ch D 395.

[79]Ibid 411.

1. His Honour continued:

It is the mortgagee’s duty to sell fairly, says one of these distinguished Judges.  It is his duty to act bona fide, says the other—for what is good faith but fairness?

I add these passages to those cited by the Chief Justice, because they are clear and pointed, though I think the statements of the law which they contain are involved in his quotation from the speech of Lord Herschell in the case of Kennedy v De Trafford.[80]  As Lindley LJ said in the same case in the Court of Appeal,[81] a mortgagee’s ‘right is to look after himself first.  But he is not at liberty to look after his own interests alone’; and these words immediately precede those quoted by Lord Herschell.  If he confines his attention to his own interests, and sacrifices the mortgagor’s property by doing so, he certainly acts unfairly, that is, in bad faith.[82]

[80](1897) AC 180.

[81](1896) 1 Ch 762, 772.

[82](1912) 13 CLR 646, 694.

1. Isaacs J commented that Lord Herschell’s words in Kennedy left it unclear how far the mortgagee was bound to take reasonable precautions in the conduct of the sale, but that ‘from the standpoint of principle … the word “recklessly” cannot include mere negligence or carelessness in carrying out the sale’.[83]

   [83]Ibid 700.

1. In Pendlebury, the mortgagee had advertised the sale of mortgaged property in the Mallee for sale in Melbourne newspapers without referring to features that would make it desirable to potential buyers and made no attempts to publicise the sale locally.  The auction took place in Melbourne, not long after the property was advertised.  The High Court held that the mortgagee had wilfully and recklessly disregarded the interests of the mortgagor and had therefore breached its duty to act in good faith.

1. In the 1970s there was a divergence between English and Australian authorities on the nature of a mortgagee’s duty in exercising the power of sale.  At least for a time, English cases held that a mortgagee’s duty was not limited to the requirement to act in good faith and that a mortgagee might be held liable to a mortgagor for failing to take reasonable care to obtain a proper price[84] for the property.

   [84]See for example Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (CA) (or perhaps the ‘true market value’: Salmon LJ (at 966)); Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410, 1415 (Denning LJ); American Express International Banking Corp v Hurley [1985] 3 All ER 565. However later cases have cast some doubt on this view see for example China and South Sea Bank Ltd v Tan [1989] 3 All ER 839, where the Privy Council rejected the view that the tort of negligence applied to a mortgagee exercising a power of sale and the discussion in Croft and Johannsson, [7.31].

1. In Forsyth v Blundell,[85] the High Court noted the conflict between Australian authority that the mortgagee’s obligation was simply to act ‘in good faith’ (ie, without wilfully or recklessly disregarding the interest of the mortgagor) and the broader English view.  On the facts in that case, Walsh and Mason JJ held that the mortgagee had breached its duty of good faith by acting recklessly and in wilful disregard of the mortgagor’s interests.  Thus they did not consider it necessary to resolve this conflict of authority.[86]  Menzies J reached a similar conclusion on the facts, but said that:

I do not think that statements in some cases, such as McHugh v Union Bank of Canada[87] or Cuckmere Brick Co Ltd v Mutual Finance Ltd,[88] that the mortgagee is under a duty to take reasonable precautions to obtain a proper price, are at odds with the rule stated by Lord Herschell [in Kennedy v De Trafford].  To take reasonable precautions to obtain a proper price is but a part of the duty to act in good faith.  This duty to act in good faith falls far short of the Golden Rule and permits a mortgagee to sell mortgaged property on terms which, as a shrewd property owner, he would be likely to refuse if the property were his own.[89]

[85](1973) 129 CLR 477. This case concerned the scope of a mortgagee’s duty under Real Property Ordinance 1925-1961 (ACT), s 94(2).

[86](1973) 129 CLR 477, 493 (Walsh J), 506 (Mason J).

[87](1913) AC 299.

[88](1971) Ch 949.

[89](1973) 129 CLR 477, 481.

1. In Victoria, of course, s 77(1) of the TLA determines the nature of the mortgagee’s duty. For many years there was controversy about whether that duty simply re-stated the equitable obligation to act in good faith or was more extensive.[90] Having regard to more recent decisions of this Court, it is unnecessary to discuss the different ways in which the mortgagee’s duty under s 77(1) was formulated by Lush J in Henry Roach (Petroleum) Pty Ltd v The Credit House (Vic) Pty Ltd[91] and by Murphy J in Goldcel Nominees Pty Ltd v Network Finance Limited.[92]  It was not suggested that these earlier decisions advanced Mr Nolan’s position.

   [90]The common law continues to apply in most states. In Tasmania, s 78(1) of Land Titles Act 1980 (Tas) is expressed in similar terms to s 77(1) of the TLA, but was held in Upton v Tasmanian Perpetual Trustees Ltd (2007) 158 FCR 118 to simply declare the common law: Kiefel and Besanko JJ (at 125-6), Graham J (at 143). Under s 84 of the Property Law Act1974 (Qld), a mortgagee is liable for negligently failing to obtain the best price on a mortgagee’s sale. See also Corporations Act 2001 (Cth), s 420A.

   [91][1976] VR 309 (‘Henry Roach’).

   [92][1983] 2 VR 257 (‘Goldcel’), 61. For discussions of these differences see Croft and Johannsson, [7.28].

1. In Kravchenko v Rock Building Society,[93] Buchanan JA said that:

Generally, the interests of the mortgagee and the mortgagor are best served by obtaining the best price that is available, and that should be the mortgagee’s aim.  Nevertheless, as the mortgagee is entitled to prefer his own interests while taking reasonable care to protect the interests of others, in certain circumstances it may be that a mortgagor will be justified in accepting a price that is less than the best price that could be reasonably be obtained,[94] but is a price that can be described as proper.  In Vasiliou v Westpac Banking Corporation[95] Maxwell P, Neave and Kellam JJA said of a mortgagee to whom s 77 of the Act applied: ‘the mortgagee is obliged to obtain the best price consistent with its entitlement to realise its security’.[96]

[93][2010] ANZ Conv R 10-005 (‘Kravchenko’).

[94]Cf Guss v Geelong Building Society (in liq) [2001] VSC 37.

[95](2007) 19 VR 229, 242.

[96][2010] ANZ Conv R 10-005, 59.

1. In Kravchenko, an employee of the mortgagee’s estate agent purchased the property.  Buchanan JA held that although the employee did not work on the sale, this did not remove him from the scope of the equitable principle prohibiting sale by a mortgagee to itself, a trustee for itself or a person employed to conduct the sale.[97] Further the mortgagee had breached its duty under s 77(1) by

abandoning the auction which had been arranged and accepting a price offered by an insider at the bottom of a range of prices which it contemplated could be obtained, without obtaining an expert appraisal of the offer …[98]

[97]Ibid 59. Dodds-Streeton JA (at [34]) suggested that this was ‘an absolute equitable principle’, despite doubts expressed by Austin J in Re One.Tel Networks Holdings Pty Ltd (Hall as rec and mgr) (2001) 40 ACSR 83, 95. Byrne AJA considered that in these circumstances the burden fell on the mortgagee to show that the sale was for the best price then available.

[98][2010] ANZ Conv R 10-005, 61.

1. We complete this review of the case law by referring to recent New South Wales cases, which have treated the mortgagor’s obligation not to act in wilful and reckless disregard of the mortgagor’s interests as a manifestation of the equitable principle of unconscionability.[99] Although the obligations of mortgagees in New South Wales are derived from the common law, New South Wales cases on the scope of the duty of good faith are also instructive in interpreting the statutory obligation to sell in good faith imposed by s 77(1).

   [99]Hawkesbury Valley Developments Pty Ltd v Custom Credit Corp Ltd [1995] NSW Conv R 55-731 (McLelland CJ in Eq).

1. In Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd,[100] McLelland CJ in Eq said:

This is an area of the law where particular phrases used in judgements should not be construed and applied as if embodied in an Act of Parliament (cf Australian Apple & Pear Marketing Board v Tonking).[101]  What matters is the underlying equitable principle, which in the modem idiom usually finds expression in terms of unconscionability.  The mortgagee is not answerable for what Isaacs J in Pendlebury describes[102] as ‘mere negligence or carelessness in carrying out the sale’.  Any departure from reasonable standards must be so serious as to be properly characterised as unconscionable, in order to render the mortgagee accountable.  If a failure by a mortgagee to take reasonable steps to obtain a proper price is sufficiently serious to be characterised as unconscionable as that expression is understood in equity, then in the taking of accounts between the mortgagee and the mortgagor, the mortgagee will be accountable on the basis of wilful default for the price which would have been obtained if the mortgagee had not been guilty of unconscionable conduct.[103]

[100]Ibid (‘Hawkesbury Valley’).

[101](1942) 66 CLR 77, 110.

[102](1912) 13 CLR 676, 700.

[103][1995] NSW Conv R 55-731, 55,650.

1. The facts of Hawkesbury Valley have some similarities to those in this case, though there the mortgagor’s chief complaints related to the mortgagee’s alleged failure to obtain an updated valuation of the property, to take account of the development potential of the land and to advertise the sale adequately.  The plaintiff had mortgaged four lots, on one of which stood a large and luxurious home (the ‘River Road lot’).  After default in payment and service of the necessary notices, the mortgagee arranged an auction of the lots.

1. The mortgagor had been trying to sell the lots other than the River Road lot to a company called LOF Investments Ltd (‘LOF’) for several months before the auction and the mortgagee was aware of these negotiations.  Thirty minutes before the auction was due to begin, the mortgagor’s solicitor contacted the mortgagee’s agent and communicated to her that his client had received an offer from LOF to purchase the three properties (excluding the River Road lot) for an amount that would discharge the mortgages.

1. One of the controllers of LOF then spoke to an agent of the mortgagee (by phone from Melbourne).  According to the mortgagee, LOF said that it would sign a contract to purchase the property if it were faxed to it before the auction, but the mortgagee’s agent refused, suggesting that a representative be sent to the auction.  All lots were then sold at auction.  McLelland CJ in Eq did not accept that any firm offer had been made.  However his Honour observed that:

even if such an offer were made in the terms deposed to either by [the solicitor for the mortgagor] or by [the controller of the third party], I would not be satisfied that there was in fact, or that representatives of [the mortgagee] should have believed there to have been, a real prospect of an exchange of contracts between [the mortgagee] and LOF for the sale of lots 1, 3 and 4 on the terms on which they were offered at auction or on other terms negotiated between [the mortgagee] and LOF, and the payment of a deposit, before the auction was due to take place.[104]  The terms of the auction contract (at least that relating to lot 4, which is in evidence) could not have been regarded as ‘standard’: they included a right in the vendor to rescind in the event of proceedings being commenced to restrain or set aside the sale.[105]

[104]Ibid 55, 650-1.

[105]This last sentence was omitted from the reported version of this case and taken from the unreported version: (Unreported, Supreme Court of NSW, McLelland CJ in Eq, 9 December 1994).

1. His Honour said that while any acts or omissions by the real estate agents were to be attributed to the mortgagee:[106]

in the circumstances known to him at the time, it was not unreasonable for [the mortgagee’s controller] to act on the basis that if LOF genuinely wished to purchase lots 1, 3 and 4 from [the mortgagee] at up to $1.675 million it would either have made a firm offer before the day of the auction or made arrangements to bid at the auction.  I accept the substance of the conversations deposed to by [the mortgagee’s controller] and am unable to conclude that his attitude constituted, or was indicative of, a failure to have proper regard to the interests of the mortgagors.[107]

[106]Commercial and General Acceptance v Nixon (1981) 152 CLR 491, 503 (Mason J).

[107][1995] NSW Conv R 55-731, 55,653.

1. McLelland CJ in Eq’s remarks equating lack of good faith to unconscionability have been cited a number of times.[108]  In State Bank of New South Wales v Chia,[109] Einstein J referred to these observations and then said that:’[t]he test of “unconscionability” correctly identifies … the underlying principle; or, the equitable grundnorm’.[110]

   [108]See the cases discussed below, and also Demarco v ANZ Banking Group (Unreported, Supreme Court of New South Wales, Cohen J, 6 November 1998); National Transport Insurance Ltd v Smith (2001) 40 ACSR 149; Gomez v State Bank of New South Wales Ltd [2001] FCA 1059; Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350; Quzag v Gunning Shire Council [2005] NSWSC 970; Deangrove Pty Ltd (recs and mgrs Apptd) v Buckby (2006) 56 ACSR 630; Kingsway Group Ltd (Formerly Known As Willis and Bowring Mortgage Investments Ltd) v Belramoul [2009] NSWSC 608.

   [109](2000) 50 NSWLR 587.

   [110]Ibid 629.

1. The concept of ‘unconscionability’ was also applied in Adamse v Broadway Credit Union Ltd,[111] which concerned the sale of mortgaged property by private treaty rather than by auction.  The decision to sell by private treaty was made after the mortgagor made numerous successful attempts at delaying the sale and unsuccessful attempts to refinance the loan.  On the facts it was held that the mortgagee had not failed to act in good faith and in wilful disregard of the interests of the mortgagor.  Cohen J referred to the statement of McLelland CJ in Eq in Hawkesbury Valley, and said that:

As McLelland CJ in Eq pointed out, however, there can be circumstances where failing to obtain a proper price could be regarded as unconscionable conduct … It may well be that a failure to consider what is a proper price or a disregard of advice to that effect may in appropriate circumstances amount to a lack of good faith.[112]

[111][1999] NSW Conv R 55-876.

[112]Ibid 55,861.

1. The underlying equitable principle was explored more recently in Ultimate Property Group Pty Ltd v Lord,[113] where Young CJ in Eq held:

The duty is a duty to act conscionably towards the mortgagor and persons under the mortgagor.  The duty is not to be considered in some mechanical way, but the whole of the mortgagee’s conduct with respect to the sale is to be considered.  The mortgagee may, up to a point, act solely in its own interests, but it must also act conscionably towards the mortgagor and those claiming under the mortgagor.

…

Indeed, it is a fundamental principle in the textbooks that mere inadequacy in the price obtained and the value will not normally of itself be sufficient for a mortgagor to upset a purported sale …[114]

[113](2004) 60 NSWLR 646 (‘Ultimate Property Group’).

[114]Ibid 652.

1. In this case, there is no doubt that MBF obtained a proper price (indeed a very good price) on the sale of the property.  However, Mr Nolan seeks to uphold the trial judge’s decision that MBF wilfully disregarded his interest in retaining Lot 1 and acted ‘manifestly unreasonabl[y]’.[115]

   [115]Liability reasons, [289].

1. We do not consider that a mortgagee’s duty to act in good faith and having regard to the interests of the mortgagor is confined to taking reasonable steps to obtain the best price consistent with its entitlement to realise its security.  In Jenkins v National Australia Bank Ltd,[116] Phillips JA (Brooking and Chernov JJA agreeing) considered that the mortgagee’s failure to preserve the mortgaged property after it took possession of it, amounted to a breach of that duty.

   [116][1999] VSCA 33, [22].

1. Where a mortgagee holds security over several lots of land and is aware or ought to be aware that it is unnecessary to sell all of the lots because the sale of some of those lots would be sufficient to satisfy the mortgage debt and the costs of sale (described below as ‘the full amount’), the sale of more lots than required would conflict with the purpose of the power of sale, which is limited to recouping the mortgagee’s loss.  Such a conflict would arise regardless of whether the mortgagee became aware that this was the case either before the sale or after one or more of the lots have been sold.

1. Where it is unnecessary to sell all of the lots held as security, to recoup the amount owed, the choice as to which lots were to be sold could not be driven by an ulterior purpose, such as disrupting the mortgagor’s business or evicting the mortgagor from a home on one of the lots.  Such behaviour would be an unconscionable exercise of the mortgagee’s power to sell the property in order to realise the debt.  In such a case, even if there were no direct evidence of the mortgagee’s subjective intention, the facts might permit a court to infer that the mortgagee had an ulterior purpose in selecting the order in which the lots were sold.

1. The selection, in such circumstances, of a lot or lots contrary to the wishes of the mortgagor, rather than an equally saleable lot or lots which would be sufficient to satisfy the full amount, might also provide the basis for an inference that the mortgagee acted in reckless disregard of the interests of the mortgagor, thus breaching the duty to sell in good faith. To that extent, the duty imposed on the mortgagee by s 77(1) to have regard to the mortgagee’s interests is not confined to a duty of obtaining the best price.

1. However, where there are genuine doubts about the saleability of some lots or whether the sale of a particular lot or lots will be sufficient to satisfy the full amount, we do not consider that the mortgagee’s duty requires it to take account of the mortgagor’s preference as to the order of sale.  The mortgagee’s duty has never been recognised as extending so far.

1. Such an extension of the mortgagee’s duty would conflict with the historical development of the mortgagee’s duty, which we have discussed above.  Historically, the Property Law Act 1958 gave the mortgagee the power to sell in a variety of ways including

by public auction or by private contract, and for a sum payable either in one amount or by instalments, subject to such conditions respecting title, or evidence of title, or other matter, as he, the mortgagee, thinks fit, with power to vary any contract for sale, and to buy in at an auction, or to rescind any contract for sale, and to re-sell, without being answerable for any loss occasioned thereby, with power to make such roads, streets and passages and grant such easements of right of way or drainage over the same as the circumstances may require and he thinks fit ...[117]

[117]Section 101(1)(a).  See also s 101(2).

1. Similar powers are conferred by s 77(1) of the TLA, which specifically permits the sale of land in lots ‘at one or several times’. This broad discretion would be difficult to reconcile with a duty on the mortgagee to have regard to the mortgagor’s preferences as to the order in which lots should be sold, except where there was no possibility that the mortgagee would be prejudiced in recovering the full amount by following the mortgagor’s proposed course of action.

1. Nor do we consider that international human rights principles require the word ‘interests’ in s 77(1) to be interpreted as extending to the right of ‘home occupation’ which his Honour found to exist on the facts of this case.

1. As we have previously explained, his Honour held that since the meaning of the word ‘interests’ in s 77(1) was ambiguous, the jurisprudence dealing with the protection of people against arbitrary interference with their home provided by the Universal Declaration of Human Rights[118] and the International Covenant on Civil and Political Rights[119] could be taken into account in determining its meaning.

   [118]GA Res 217A (III), UN Doc A/810 at 71 (1948).

   [119]Opened for signature 16 December 1966, 999 UNTS 171 (entered into force 23 March 2976).

1. That argument cannot be sustained.  It was not until 2005 that Mr Nolan was able to resolve his dispute with Mr Collie and obtain the balance of the proceeds of sale of the three lots which had been paid into court.  Before the auction, Mr Collie had given a sworn estimate of the debt Mr Nolan owed to him as in the order of $548,000.[223]  He had made it plain in the days preceding the auction that he wished all three lots to be sold so that the debt owed to him would be discharged from the proceeds of sale.  He sought an injunction to that effect on the day preceding the auction.  It was further acknowledged on appeal that Mr Collie subsequently claimed that he was owed far more than that figure.  Having regard to these facts, it is highly speculative to suggest that, if Lot 1 had been retained, Mr Collie would have taken no step to have Lot 1 sold and would have agreed to Mr Nolan using Lot 1 as security for the Rhodens Mortgages loan.  The more likely hypothesis is that the very factors which prevented Mr Nolan from obtaining access to the proceeds of sale more than three and a half years after the sale would similarly have prevented Mr Nolan from borrowing further funds on the security of Lot 1 so that he could pay out Mr Collie and avoid the sale of Lot 1.

   [223]See [8] above.

1. We would therefore accept the submission of MBF that, even if the power of sale had been improperly exercised, its default was not a cause of any loss to Mr Nolan.

1. For the reasons expressed at [164], we now turn to the question of damages if MBF’s exercise of the power of sale was wrongful and caused Mr Nolan to suffer loss.

Damages (Grounds 15,  16 and 21, Cross-appeal grounds)

1. In the case of a breach of s 77(1), s 77(4) of the TLA makes provision for damages to be awarded in these terms: ‘any person thereby damnified [by an improper or irregular exercise of the power of sale] shall have his remedy in damages against the person exercising the power’.

1. The trial judge recognised that, where there is a breach of the duty under s 77 of the TLA, relief is usually granted by way of taking an account. In a second judgment delivered following his Honour’s decision on liability, his Honour declined to adopt this ‘mode of assessment’ and held that Mr Nolan was entitled to either common law damages or equitable compensation, to be determined on the basis of the material adduced at trial.[224]  That decision was not the subject of appeal.

   [224]Nolan v MBF Investments Pty Ltd (No 2) [2009] VSC 340.

1. As Aickin J observed in Commercial & General Acceptance Ltd v Nixon,[225] the relationship of mortgagor and mortgagee is more than that of contract, the nature of the relationship having been worked out by the Court of Chancery.[226]  The authorities and the commentaries in respect of claims by mortgagors against mortgagees in respect of an improper exercise of the mortgagee’s power of sale, where the sale has been completed, are all to the same effect, namely that the proceeding is a claim in equity for an account.[227]  That is so whether the allegation is that the mortgagee sold the mortgaged property at an undervalue or otherwise in breach of the mortgagee’s duty in relation to sale.

   [225](1981) 152 CLR 491.

   [226]Ibid 515.

   [227]McGinnis v Union of Bank AustraliaLtd [1935] VLR 161; Coroneo v Australian Provincial Assurances Association Ltd (1935) 35 SR (NSW) 391; Colin D Young Pty Ltd v Commercial & General Acceptance Ltd (1982) NSW Conv R 55-097; E L G Tyler, P W Young and C Croft, Fisher & Lightwood’s Law of  Mortgage (2^nd Aust ed, 2005) [20.20]; R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (4^th ed, 2002); Sykes; Denis Browne, Ashburner’s Principles of Equity (2^nd ed, 1933); L Voumard, The Sale of Land in Victoria (4^th ed, 1986) 162.

1. It is suggested in Fisher & Lightwood’s Law of Mortgage that the reference to a remedy in damages in s 77(4), which has been in the statute since at least 1928, does not appear to create a special statutory remedy but is a reference to the mortgagor’s right in equitable proceedings to hold the mortgagee to account for wilful default.[228]  Where there is to be an accounting on the basis of wilful default, the defendant is required to account for what he or she might have received had it not been for the default.[229]

   [228]E L G Tyler, P W Young and C Croft, Fisher & Lightwood’s Law of  Mortgage (2^nd Aust ed, 2005) [20.20]; McGinnis v Union of Bank Australia [1935] VLR 161; Coroneo v Australian Provincial Assurances Association Ltd(1935) 35 SR (NSW) 391; Colin D Young Pty Ltd v Commercial & General Acceptance Ltd (1982) NSW Conv R 55-097.

   [229]Partington v Reynolds (1858) 62 ER 98, 98–9 (Kindersley VC); Re Stevens [1898] 1 Ch 162, 171 (Chitty LJ); Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd (No 2) [2001] NSWSC 6.

1. In his Honour’s judgment on damages, no further reference was made to the claim for equitable compensation. His Honour characterised Mr Nolan’s claim, presumably for common law damages, as arising from the tort of breach of statutory duty flowing from the contravention of s 77(1) TLA.[230]  His Honour said:

The Defendant had a statutory duty to a [sic] Plaintiff to prevent the occurrence of damage of the kind which occurred in this case.  The Defendant’s breach of duty being a cause of that damage, and the damage which I have found being within the scope of the risk which the Defendant was required to avoid, the Defendant is consequently liable to make good the loss.[231]

[230]Nolan v MBF Investments Pty Ltd (No 3) [2009] VSC 457 (‘Damages reasons’), [15].

[231]Ibid [75].

1. Mr Nolan’s claim for damage at trial thus rested upon the contention that, had he retained Lot 1, he would have borrowed up to $450,000 from Rhodens Mortgages against Lot 1 to satisfy Mr Collie’s claim.  The calculation of Mr Nolan’s loss and damage was set out in Exhibit P1 and rested upon the assumption that he was entitled to the difference between the sale price achieved on the date of the auction and the market value of Lot 1 at the date of judgment, being the loss of capital appreciation of Lot 1 between those dates.

1. While the relief which Mr Nolan had sought at trial encompassed equitable compensation and common law damages, his submissions before this Court rested solely upon torts principles, presumably because that was the basis upon which the trial judge appears to have assessed his damage.

1. MBF submitted that, where a mortgagee sells the property for the best price possible, the mortgagor does not suffer any loss that is recoverable from the mortgagee.  It referred to a line of authority including Pendlebury,[232] Jenkins v National Australia Bank,[233] Vasiliou v Westpac Banking Corporation[234] and Sablebrook Pty Ltd v Credit Union Australia Ltd[235] in support of this proposition.  All of those cases except Jenkins[236] involved allegations that the sale was improperly executed.  None of them considered whether the mortgagor could recover more than the value of the property minus the sale price and costs of realisation.  MBF further submitted that it would be arbitrary and capricious if the mortgagor were permitted to select the point in time up to which his damage should be calculated, and that there was no occasion to assess the mortgagor’s loss at any later date than the date at which the power of sale was wrongfully exercised, as Mr Nolan had notionally received in his hands the full equity in Lot 1 which had been sold at a fair market value.

   [232](1912) 13 CLR 676, 692 (Griffith CJ).

   [233][1999] VSCA 33 (‘Jenkins’), [22] (Phillips JA).

   [234](2007) 19 VR 229, 242.

   [235][2008] QSC 242, [149].

   [236]In Jenkins the default lay not so much in the mortgagee selling at an undervalue as in the bank’s failure to preserve the property of which it took possession as mortgagee, with the result that by the time of sale its value was much diminished: see [1999] VSCA 33, [23] (Phillips JA).

1. While recognising that ordinarily a person wrongfully deprived of their land would be entitled to damages for such deprivation assessed by reference to the value of the land as at the date of the deprivation,[237] his Honour proceeded upon the assumption[238] that Mr Nolan was entitled to damages for loss of the increase in the value of the property for a period of time after the sale.[239]  Beyond stating that MBF was in breach of its statutory duty, it is difficult to discern upon what principle his Honour relied to assess Mr Nolan’s continuing loss, after sale.  We observe in passing that his Honour would not have been entitled to simply proceed on the basis of some analogy between equitable proceedings for relief, and tort.

   [237]Damages reasons, [42].  See Spencer v Registrar of Titles (1910) 103 LT 647 (PC).

   [238]No authority was cited for the approach that was taken to this assessment of damage.

   [239]Damages reasons, [43]–[64].

1. There was no argument advanced by either party to support the judge’s apparent conclusion that there was either a right to claim common law damages for a breach of s 77 of the TLA or a special statutory right to damages pursuant to s 77(4). Nor was any submission made on the question whether a claim for an account or equitable compensation could include future loss arising from a wrongful sale of the security where the property had not been sold at less than its full market value. These matters not having been the subject of any argument, we shall assume, without deciding, that, in the case where the decision to sell by the mortgagee is in breach of its duty to act in good faith, the mortgagor may be entitled to damages for future loss of the security even though it was sold at full market value. We further assume for this purpose that Mr Nolan’s claim was to be assessed as at the date that the wrong was committed – namely on 18 August 2001 when Lot 1 was sold.

1. While Mr Nolan did not challenge his Honour’s approach, by way of cross-appeal he contended that the trial judge wrongly circumscribed the period over which that loss should be calculated.[240]  On the assumption that the approach to damages adopted by his Honour was open, we will, for completeness, briefly address the substance of the grounds of appeal and cross-appeal as to damages that were argued on the appeal.

   [240]Ibid [52].

1. Mr Nolan sought to uphold the findings of the trial judge that the Rhodens Mortgages loan was still available at the time of the auction, that he would have been able to vary the injunction restraining him from dealing with Lot 1 so as to obtain the Rhodens Mortgages loan, that he would have paid out Mr Collie and that he had the means to make the interest payments on the Rhodens Mortgages loan as they fell due.  MBF challenged each of these findings.[241]  In his cross-appeal, Mr Nolan challenged the trial judge’s finding that he would only have been able to make the payments on the Rhodens Mortgages loan in the first year and by the second year would have been in default and would not have been able to retain Lot 1. 

Trial judge’s calculation of loss and damage

[241]Grounds of appeal 15 and 16.

1. The trial judge calculated the loss of the increase in the value of Lot 1 over the period of two years immediately following the sale – namely the period between 2001 and 2003 – in the sum of $255,000.[242]  This figure was arrived at in the following way.  The trial judge assessed that some $430,000 of the Rhodens Mortgages loan was required by Mr Nolan to pay out Mr Collie and meet other expenses,[243] while the balance of $20,000 of the Rhodens Mortgages loan would have been consumed in making payments of interest under the loan. His Honour was not satisfied that, beyond the conclusion of the two year period of the Rhodens Mortgages loan, Mr Nolan would have been in a financial position to accept any further loans and so retain the property. His Honour further found that Mr Nolan would have been at risk of not being able to make the interest payments after the first year of the Rhodens Mortgages loan,[244] and that it was more than likely that Mr Nolan would have fallen into default. His Honour assessed such default interest as $56,250, which he deducted from the capital gain which Mr Nolan would have enjoyed.[245]  His Honour also deducted the sum of $36,304, being the interest which Mr Nolan was able to derive from funds deposited in court and which could have been used to make the interest payments under the Rhodens Mortgages loan.[246]  Finally, his Honour also deducted an amount of $38,400 for sales costs if Lot 1 had been put on the market at the end of 2003 or early 2004.[247]  The trial judge also allowed Mr Nolan $5,000 by way of removal costs in having to vacate his home following the settlement of the sale of Lot 1.  In summary, the pecuniary loss suffered was therefore assessed as follows:

   [242]Damages reasons, [52].

   [243]Ibid [57]. We note that this amount is less than the amount estimated to be owed to Mr Collie: see [8] and footnote 9 above.

   [244]Damages reasons, [54]–[60].

   [245]Ibid [61].

   [246]Ibid [55], [62].

   [247]Ibid [64].

Loss of capital growth in Lot 1 between 2001 and 2003	$255,000
Less year 2 default interest on the Rhodens Mortgages loan	$56,250
Less after tax interest derived from funds invested in Court (17 November 2001–23 November 2003):	$36,304
Less sale costs	$38,400
Plus removal costs	$5,000
TOTAL	$129,046

1. MBF submitted that, at the time of sale, there was no evidence that the Rhodens Mortgages loan would have been offered, given the absence of any evidence of Mr Nolan’s capacity to service it at the time of the sale.  The trial judge concluded that the offer of finance from Rhodens Mortgages to Mr Nolan was available to Mr Nolan as at the date of the auction.  Although Mr Nolan had not satisfied any of the terms of the offer and had taken no steps to progress the loan, we see no error in the trial judge’s conclusion that the loan was available to Mr Nolan.

1. Next, MBF submitted that Mr Nolan did not have the intention to discharge the Collie debt at the time of the auction and would not have taken up the Rhodens Mortgages loan and paid out the debt owed to Mr Collie by mid November 2001. 

1. The trial judge accepted that the primary purpose of arranging the Rhodens Mortgages loan was to pay out Mr Collie.  His Honour found that Mr Nolan would have taken up the Rhodens Mortgages loan in order to pay out Mr Collie to its limit of $450,000, if that was needed.[248]  His Honour was also satisfied that the high probability was that the order which had been made by Warren J would have been varied to accommodate such a transaction.  MBF challenged these findings,[249] contending that there was not adequate evidence to support them.  While there appeared to be much force in a number of MBF’s contentions, we are not persuaded that it was not open to his Honour to make these findings.  In any event, all of these issues became subsumed, during oral argument on the appeal, within MBF’s primary contention that Mr Nolan had failed to establish that he had the capacity to take up and service the Rhodens Mortgages loan.

   [248]Liability reasons, [214].

   [249]Ground of appeal 15(d).

1. Mr Nolan’s contention that he would have been able to service the mortgage of $450,000 rested on the proposition that the funds referred to in Exhibit P1 were available to service the mortgage and by inference, that those funds had been used to pay the rental of the home in which Mr Nolan and his family resided after the sale of Lot 1.  Exhibit P1 was admitted without challenge as to the calculations that demonstrated that Mr Nolan had the means to service the loan.  The items set out in Schedule E to the Exhibit included $90,000 by way of cross-orders against Mr Collie in favour of Mrs Nolan recovered by her in May 2002, and $125,000 by way of consent orders in Mr Nolan’s favour against MBF’s solicitors in respect of overcharges in respect of legal fees capitalised into the mortgage, being the subject of orders of the taxing master in December 2002 and April 2003.  Although the balance of the proceeds of sale paid into Court was not released to Mr Nolan until June 2005, he submitted that the moneys the subject of items E2, E3 and E4 were sufficient to service the Rhodens Mortgages loan or its equivalent for at least six years.

1. At trial, Mr Nolan did not draw attention to the amounts set out in E2, E3, and E4 of Exhibit P1 and did not invite the trial judge to infer that these amounts established a financial capacity on his part to service a necessary loan so that he could remain at Lot 1.  Because no such submission was made, the trial judge understandably fell into error in assuming that Mr Nolan’s rental was paid by the release of the proceeds of sale from court.  Those proceeds were not released until 2005.  On appeal, Mr Nolan contended that the trial judge’s conclusion that Mr Nolan had the capacity to service the Rhodens Mortgages loan was nonetheless correct as the funds set out in Exhibit P1 and Mrs Nolan’s earnings of $52,000 a year meant that Mr Nolan had the means to remain in residence at Lot 1.  He asserted that the evidence showed that he could have resided there for a much longer period than two years. 

1. The primary argument thus focussed on whether the evidence at trial established that Mr Nolan had such a financial capacity.  There was extensive oral argument on the appeal as to what it was that Exhibit P1 established, much of which we need not recite.  MBF pointed to the course of Mr Nolan’s evidence to show that Exhibit P1 had not been received into evidence as proof of anything more than that certain amounts were received by the Nolans or that expenses were incurred and that the  calculations were correct.  It submitted with some force that Mr Nolan had not disclosed his financial circumstances at trial.

1. The absence of explicit evidence from Mr Nolan concerning his financial capacity must be considered in the context that Mr Nolan had not been in the position to make his mortgage payments to MBF or the ANZ and was unable to pay other debts even with the benefit of Mrs Nolan’s income during 2001.  An evidentiary onus rested upon him to place before the Court all available relevant material concerning his financial circumstances and in particular his source of income.[250]  Mr Nolan did not do so.  No explanation for that forensic decision was forthcoming during the appeal.  Given the course of the evidence, we consider that Exhibit P1 could be given only little weight as proof of his financial position.

   [250]JLW (Victoria) Pty Ltd v Tsiloglou [1994] 1 VR 237.

1. The trial judge found that Mr Nolan was able to pay his debts and service a loan for a period of two years.  We are not persuaded that it was not open to his Honour to so conclude.  But we do not accept that such evidence as was adduced permits the conclusion that his financial circumstances were such that he could have remained in occupation of Lot 1 beyond that time.  For that, and also for the following reason, the cross-appeal must be dismissed.

1. The measure of damages flowing from a tort or breach of contract does not expand according to the length of time taken to obtain an award of damages.  A person who suffers damage as the result of such a breach has an obligation to mitigate his or her loss.  Damages for the wrongful sale would ordinarily not exceed what it would have cost to have obtained elsewhere that which should not have been sold.

1. Mr Nolan had received a fair market price for the sale of all three lots.  If, as he contended, he had the financial capacity to obtain and service the Rhodens Mortgages loan or some other loan to pay out Mr Collie, vary the injunction and make payments on the new loan up to the date of trial, then he had the capacity to acquire another property in the same market so that his residence in the same market would only have been marginally interrupted.  But Mr Nolan did not seek to acquire other real estate in the Kew area.

1. Mr Nolan accepted on the appeal that, if he had been able to acquire other real estate in Kew, he would not be entitled to capital appreciation from the time that he should have purchased another property.  It was submitted that he was unable to do so because of his entanglement with Mr Collie, a matter of which MBF was aware.  That submission cannot be sustained.  Mr Nolan’s claim that he could have remained in occupation of Lot 1 must rest upon the proposition that his financial circumstances were such that he could have paid out Mr Collie or come to some arrangement that would have enabled him to continue to own Lot 1.  If he had that capacity to disentangle himself from Mr Collie, then there was no impediment to him doing so after Lot 1 was sold.  But even after Mr Nolan had received the balance of the proceeds of sale in June 2005, he still made no attempt to acquire any real estate in Kew.  Mr Nolan offered no explanation for not having done so. 

1. In our opinion, were his financial circumstances as he claimed, Mr Nolan should have bought an alternative property in Kew within a reasonable period, which we consider would have been twelve months from the time that the settlements of the lots was completed.  He would have been entitled to a small capital appreciation for the period before he was able to re-invest in real estate in Kew and to transaction costs in moving and having to purchase a new property.  Such an amount would not, in our opinion, have exceeded the amount of damages actually awarded.

1. If it was correct in principle that Mr Nolan was entitled to a loss of capital appreciation for a period after the sale, Mr Nolan did not establish a right to a greater measure of damage than that found by the trial judge.  No additional compensable loss was sustained as Mr Nolan had received full value for the loss of the equity of redemption and was equipped to reinvest in the same market with minimal interruption of possession.  Allowing that the trial judge had not reached his conclusion by reference to items E2, E3 and E4 of Exhibit P1, the cross-appeal must in any event fail. 

1. The appeal must be allowed and the judgment in favour of Mr Nolan set aside.  The cross-appeal must be dismissed.

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