New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd

[2007] NSWSC 474

CITATION:	New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd & 12 Ors [2007] NSWSC 474 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	02/05/07
JUDGMENT DATE :	3 May 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	White J
EX TEMPORE JUDGMENT DATE:	3 May 2007
DECISION:	Parties to bring in Short Minutes of Order in accordance with reasons.
CATCHWORDS:	MORTGAGE – Judicial sale – Conveyancing Act 1919 (NSW) s 103 – General equitable jurisdiction – Whether jurisdiction should be exercised – Whether second mortgagee should be compelled to discharge its security although debt not fully repaid – Minimal potential for gain to second mortgagees disproportionate to risk of loss to mortgagor and guarantor if forced mortgagee sale carried out – Held that exceptional circumstances existed so as to warrant directing judicial sale.
LEGISLATION CITED:	Real Property Act 1900 (NSW) Conveyancing Act 1919 (NSW) Chancery Procedure Act (1842) Law of Property Act (1925) UK Property Law Act 1969 (WA)
CASES CITED:	King Investment Solutions v Hussain [2005] NSWSC 1076 Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 Palk & Anor v Mortgage Services Funding Plc (1993) Ch 330 Sandgate Corp Pty Limited (in Liq) v Ionnou Nominees Pty Limited (2000) 22 WAR 172 Woolley v Colman (1882) 21 Ch D 169 L Aitkin, “Mortgagor's Rights” (2007) 74 ALJ 226 Yarrangah Pty Limited v National Australia Bank Limited [1999] 9 BPR 17,061 Guardian Mortgages v Miller [2004] NSWSC 1236 Cheltenham & Gloucester Plc v Krausz [1997] 1 WLR 1558
PARTIES:	New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd & 12 Ors
FILE NUMBER(S):	SC 2351/07
COUNSEL:	Plaintiff: R W Tregenza 1st-7th Defendants: S Khouri 8th Defendant: M Henry
SOLICITORS:	Plaintiff: Carbone Lawyers 1st-7th Defendants: DLA Phillips Fox 8th Defendant: Carroll & Associates

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IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
DUTY JUDGE LIST

WHITE J

Thursday, 3 May 2007

2351/07 New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd & 12 Ors

JUDGMENT

1 HIS HONOUR: This is an application by a mortgagor for a judicial sale of land under the Real Property Act 1900 (NSW) over opposition by the second mortgagees. The land in question is a development site at 44 New Beach Road, Darling Point. The plaintiff is the registered proprietor. The site has approval for the construction of three apartments, each over two levels. The land has been excavated so as to create a level building platform and the ground-floor concrete slab. The plaintiff has run out of money. It cannot afford to do further work on the development. No income can presently be derived from the property. The plaintiff cannot pay its mortgage debts or other costs associated with holding the land.

2 The eighth defendant is the first mortgagee. As at 17 April 2007, it was owed $7,749,621.43. Interest on that debt at the default rate is 14 per cent per annum. The first to the seventh defendants are the second mortgagees. They advanced $1,800,000 in July 2003. As at 18 April 2007, the second mortgagees were owed $5,953,000. Interest accrues at the default rate of 35 per cent per annum compounded monthly.

3 It appears from a valuation report of Landmark White dated 17 April 2007 that the site has been idle for some years. There was a marketing campaign in 2005 for the sale of the site through selling agents Bradfield and Pritchard which, at some point, was withdrawn. Another firm of real estate agents McGrath Partners reported on 7 March 2007 that:

“ ... for the past 18 months McGrath has had a sign board placed on the site endeavouring to sell the apartments off the plan. However the inactivity of the site has not resulted in any sales, during this time we have fielded numerous enquiries from prospective purchasers of the site from developers. Despite the enquiries received, there has not been one genuine offer put forward for your consideration. ”

4 McGrath Partners opined that if the property were properly marketed, whether by auction or by private treaty, the site would sell for somewhere in the range of $6,700,000 to $7,400,000 in today's market.

5 On 29 November 2006, Mr Sukkar, a registered valuer with Landmark White, assessed the current market value of the site, inclusive of liability for GST, as $8,000,000. On 16 February 2007, he advised that on a forced sale basis he considered a discount of 20 per cent was appropriate, given the incomplete nature of the development. On 17 April 2007, he compiled a further report elaborating upon his reasons for that opinion. His valuation and his reasons for his estimate of an appropriate forced sale discount were not challenged.

6 On 18 February 2007, Mr Foley Jennings, a registered valuer with R B Diamond, assessed the current market value of the site as at that date as $7,000,000 exclusive of GST. In coming to those opinions on value, the valuers have taken into account the recent history of the site and what is described as a stigma in the marketplace for the property. Apparently this is as a result of litigation experienced by the developer with an adjoining owner and with the council, resulting in delays to the excavation works.

7 On 6 March 2007, the plaintiff entered into a contract to sell the site to 44 New Beach Road Pty Limited for $7,750,000 inclusive of GST. This is above the value assessed by Mr Foley Jennings, although below the value assessed by Mr Sukkar, as the current market value for an unforced sale. It is above McGrath Partners' market appraisal. Settlement was due to occur under that contract on 14 March 2007.

8 Mr Hanna is the sole director of the plaintiff. He is also a guarantor of the loan secured by the first mortgage. He deposes that he has no association with the purchaser, except as a director of the plaintiff which has entered into the contract of sale with the purchaser. It was common ground that the offer from 44 New Beach Road Pty Limited came through a real estate agent, but not as a result of active marketing of the property.

9 The position taken by the first mortgagee, the eighth defendant, was advised in a letter of 9 March 2007. The eighth defendant stated:

“ Statewide Secured Investments Limited as First Mortgage will not stand in the way of the Contract for Sale to sell the Mortgaged Premises for $7.75 million and on this basis shall provide a discharge of mortgage and associated discharges on the basis our facility is paid out in full.
We understand that the sale price of $7.75 million is fair and reasonable.
We confirm that Statewide Secured Investments Limited will not remain as First Mortgage if the Second Mortgagee endeavours to take over the property. If the Second Mortgagee elects to do so we shall require our facility to be discharged and paid out in full.
If the said sale does not proceed for any reason, we shall be forced to take possession following the issuing and expiration of the standard statutory notices and proceed to conduct a sale as mortgagee in possession. We note in this event the stigma of such a sale and the extra costs including but not limited to: selling costs, marketing, GST and ongoing interest that may prejudice our ability to recoup all monies due pursuant to our facility.
Consequently we reserve our rights. ”

10 On 12 March 2007, the plaintiff's solicitors wrote to the solicitor for the second mortgagees advising of the sale. They asked that the second mortgagees provide discharges of mortgage unless they were prepared to pay out the first mortgage and assume control of the security. There was no reply to that letter.

11 The purchaser issued a notice to complete. On 3 April 2007, the plaintiff's solicitors again wrote to the solicitors for the second mortgagees. They said that it was clear there would be no funds available after the discharge of the first mortgage for the second mortgagees, but that a sale by the first mortgagee was likely to achieve a lower price than had already been achieved. They said that it was unlikely a higher selling price could be achieved, and that delay would cause further accumulation of interest which would make it even less likely that there would be any moneys available for the second mortgagees. They foreshadowed an application to the Court for an order authorising the plaintiff to complete, even without the second mortgagees' consent.

12 Although there was no substantive response to this correspondence, I was told from the bar table by the solicitor representing the second mortgagees, Ms Khouri, without objection that the second mortgagees introduced a third party to negotiations for purchase. When the matter was listed for hearing yesterday, it was stood down in the list whilst further negotiations ensued with 44 New Beach Road Pty Limited. When the matter came on for hearing, the plaintiffs tendered an offer of 2 May 2007 from that company. The offer was to vary the purchase price from $7,750,000 to $8,150,000, with $7,950,000 to be payable on completion and $200,000 to be payable ninety days after settlement. The plaintiff has undertaken to accept that offer. The contract, I was told, is due to be completed tomorrow, that is 4 May 2007. However, the second mortgagees are not willing to provide discharges of the mortgage. Although no evidence was led from them, I was told that they were not satisfied that the best available price had been obtained. The offer from the purchaser, it was said, was not the result of a transparent marketing process. During negotiations yesterday, the price offered had been increased by $400,000. It was submitted that this showed it was possible that an active marketing campaign would or might yield increased offers.

13 The plaintiff and the first mortgagee want to keep the bird in the hand. If the sale to 44 New Beach Road Pty Limited goes off, it appears from the first mortgagee's letter of 9 March 2007 that it will exercise its power of sale as mortgagee. It has given notice under s 57(2)(b) of the Real Property Act to put it in a position to do so. The second mortgagees will not have control of any marketing campaign. The plaintiff points to the unchallenged expert evidence that the price now obtained represents current market value and that if the mortgagee exercises its power of sale, it is likely to lead to a substantially lower price, as well as resulting in delay.

14 The first question is what is the jurisdiction to compel a mortgagee to discharge its security even though its debt has not been fully repaid? Section 103 of the Conveyancing Act 1919 (NSW) provides:

“103 Sale of mortgaged or charged property in proceedings for foreclosure etc

(1) Any person entitled to redeem mortgaged property may have an order for sale instead of for redemption in any proceedings instituted by the person either for redemption alone or for sale alone, or for sale or redemption, in the alternative.
(2) In any proceedings, whether for foreclosure, or for redemption, or for sale, or for the raising and payment in any manner of mortgage money or an amount secured by a charge, the Court, on the request of the mortgagee or person whose land is subject to the charge, or of any person interested either in the mortgage money or amount so secured or in the right of redemption, and notwithstanding the dissent of any other person, and notwithstanding that the mortgagee or person whose land is subject to the charge or any person so interested does not appear in the proceedings, and without allowing any time for redemption or for payment of any mortgage money or amount so secured, may direct a sale of the mortgaged or charged property on such terms as to the Court may seem just, including, if the Court thinks fit, the deposit in court of a reasonable sum fixed by the Court to meet the expenses of sale and to secure performance of the terms.
(3) In any proceedings instituted by a person interested in the right of redemption or by a person whose land is subject to a charge and seeking a sale, the Court may, on the application of any defendant, direct the plaintiff to give such security for costs as the Court thinks fit, and may give the conduct of the sale to any party or other person, and may give such directions as to the Court may seem just respecting the costs of the defendants or any of them.
(4) In any case within this section the Court may direct a sale without previously determining the priorities of incumbrancees or mortgagees, and may direct a sale out of Court.
(5) (Repealed)
(6) This section applies to proceedings instituted either before or after the commencement of this Act.
(7) Except as provided by section 101, this section applies only to charges imposed under section 88F on land which is not under the provisions of the Real Property Act 1900.”

15 The powers conferred by s 103(1) and (2) are distinct powers (King Investment Solutions v Hussain [2005] NSWSC 1076 at [71]). The legislative history of s 103, or its equivalents, has been explained in a number of cases: Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 at 379; Palk & Anor v Mortgage Services Funding Plc (1993) Ch 330 at 335; Sandgate Corp Pty Limited (in Liq) v Ionnou Nominees Pty Limited (2000) 22 WAR 172 at [36]-[42]; King Investment Solutions v Hussain at [67]-[71]. Its predecessor (s 48 of the Chancery Procedure Act (1842)) was introduced as a remedial measure in foreclosure suits to expressly confer a power of sale in such suits.

16 It was well established that a sale could be ordered against the wishes of a mortgagee. However, prior to Palk & Anor v Mortgage Services Funding Plc, that was only done by fixing a reserve or otherwise ensuring that the mortgagee's position was protected so that the mortgage debt would be paid (Woolley v Colman (1882) 21 Ch D 169; Manton v Parabolic Pty Ltd at 380 and cases cited.)

17 In Palk & Anor v Mortgage Services Funding Plc, the Court of Appeal in England held that under s 91 of the Law of Property Act (1925) UK, which is in materially the same terms as s 103 of the Conveyancing Act, the Court had power to direct a sale, even though a large part of the mortgage debt would remain outstanding.

18 In that case, the property market had moved against the borrowers such that the value of the security was substantially less than the mortgage debt. The mortgagors had negotiated a sale for £283,000, but the amount required to redeem the mortgage was £358,587. The sums due on the mortgage were increasing at about £43,000 per year. The mortgagee did not wish to exercise its power of sale. It proposed to let the property until the market improved. The rents would not go near meeting the interest debt. Hence, the liability of the mortgagors on their personal covenant was bound to increase inexorably. The Court of Appeal held that this course was highly prejudicial to the borrowers; that the statutory power to direct a sale was not dependent on its being shown that the mortgagee was acting in breach of duty to the mortgagor (at 338-339); that the risk of loss to the mortgagor far outweighed the prospect of gain to the mortgagee; and that if the mortgagee wished to back its confidence in the property market’s improvement, it could purchase the property itself because the sale would be one directed by the Court (at 340).

19 In Sandgate Corp Pty Limited (in liq) v Ionnou Nominees Pty Limited, Steytler J held that s 55 of the Property Law Act 1969 (WA), being that State's equivalent provision, applied to Torrens land and directed sale against the wishes of some of a very large number of registered first mortgagees.

20 However, s 103 of the Conveyancing Act does not apply to Torrens land. In my view, the reason for this is because s 90 of the Conveyancing Act provides that the provisions of Div 1 of Pt 7, in which s 103 is included, apply to mortgages and charges on land under the Real Property Act only to the extent specified in those provisions. Whatever may be the meaning of subs 103(7) (as to which, see L Aitkin, “Mortgagor's Rights” (2007) 74 ALJ 226 at 227), there is no specification that s 103 applies generally to mortgages under the Real Property Act (King Investment Solutions v Hussain at [75], and see also Yarrangah Pty Limited v National Australia Bank Limited [1999] 9 BPR 17,061 at [22]; but also compare Sandgate Corp Pty Ltd (in liq) v Ionnou Nominees Pty Limited at [65]-[69]).

21 In Yarrangah, Young J, (as his Honour then was) held that it was probably the case that the Court had an inherent jurisdiction to direct judicial sale in an appropriate case in respect of Torrens land by analogy to cases that under old system title would be dealt with by s 103. His Honour said:

" [22] As I explained in Manton v Parabolic , above, s 12 of the Equity Act 1901 and its predecessor, which in due course became s 103 of the Conveyancing Act , were part of the equity procedure in foreclosure suits. Because foreclosure under the Torrens system is dealt with administratively after an aborted sale by auction the matter never comes before the Court of Equity and so s 103 and its predecessor did not apply to purely Torrens system land.

[23] However, this did not affect the power that there was in the court to order judicial sale in an appropriate case. It is merely an illustration that in some situations the statute had set out a power that was previously part of the general law. ...

...

[29] It would seem to me that the extraordinary judicial power to order sale in equity would apply by an analogy to certain cases that would be dealt with under s 103 for Old System land. Palk’s case, above, would be one, though it may be that Mr Thomson is correct in submitting the Palk situation could be dealt with under equity’s jurisdiction to protect sureties.
[30] Accordingly, in my view, the probability is that there is an equitable power to award judicial sale at the suit of a mortgagor where the circumstances show that there is clear prejudice from the application of the ordinary methods of foreclosure or sale under a power of sale. "

22 His Honour spoke guardedly because the question was not the subject of full argument. His Honour's conclusion that there is inherent jurisdiction to order judicial sale of Real Property Act land has been accepted in later cases (Guardian Mortgages v Miller [2004] NSWSC 1236 at [121]-[122]; King Investment Solutions v Hussain at [78], [81]). The jurisdiction is to be exercised by analogy in the circumstances in which the power under s 103 can be exercised. In Yarrangah, Young J considered (at [29]) that cases such as Palk would fall within the inherent jurisdiction. His Honour thought that Palk might fall within equity's jurisdiction to protect sureties but in Palk, as in this case, the plaintiffs were borrowers and the jurisdiction in respect of sureties was not the basis of the Court of Appeal's decision.

23 The second mortgagees accepted that there is inherent jurisdiction which can be exercised by analogy to cases which would be dealt with under s 103. The jurisdiction to direct judicial sale would not be exercised so as to interfere with the mortgagee's exercise of its power of sale (Cheltenham & Gloucester Plc v Krausz [1997] 1 WLR 1558; Yarrangah at [37]). But that is not this case. The first mortgagee does not wish to exercise its power of sale. It consents to the sale by the mortgagor. If the sale by the mortgagor cannot proceed because of the objections of the second mortgagees, the second mortgagees will still not be able to exercise their powers of sale. The first mortgagee will step in. Nor have the second mortgagees sought to exercise a power of sale to this point.

24 It is not necessary, in order to exercise the jurisdiction, for it to be shown that the second mortgagees have breached any duties owed to the mortgagor (Palk at 339, 343). Hence, the submissions were not directed to whether the Court has power to direct a sale against the wishes of the second mortgagees, and as an incident of that power to direct the discharge of their mortgages. Rather, the submissions were directed to whether that jurisdiction should be exercised. I turn to that question.

25 The jurisdiction is undoubtedly one reserved for special or exceptional cases (Yarrangah at [37], and Palk at 344). In my view, this is such a case. The circumstances are similar to those in Palk. Ms Khouri, for the second mortgagees, sought to distinguish Palk on the ground that, there, the mortgagee had taken possession and did not propose to exercise its power of sale for an indefinite time, but rather to let the property at rents which would not meet interest costs. Those are factual differences, but in my view, they do not affect the similarity of the circumstances. Here, the fact that there is no income to be derived makes it a stronger case for directing a judicial sale. Although the first mortgagee will sell if the sale to 44 New Beach Road Pty Limited does not proceed, there will be delay, interest will continue to run, and most importantly the prospects of achieving a better result are speculative. The potential for gain to the second mortgagees is disproportionate to the risk of loss to the mortgagor and guarantor. It is undoubtedly a strong thing to deprive a lender of his security, but as Palk shows it is inherent in mortgage securities that they are amenable to the exercise of the overriding statutory inherent powers of the court.

26 No-one can know with certainty what course will produce the best price. The key factors, in my view, are, first, that the expert opinion is to the effect that a forced sale, through the eighth defendant exercising its power of sale as mortgagee, is likely to produce a substantially lower price of up to 20 per cent less than the current price. Such expert opinion is more reliable than the personal views either of the parties or of the judge. Secondly, because the price achieved is at the upper end of the valuers’ assessments of current market value, the potential for realising a higher price is significantly less than the risk of achieving a substantially lower price through a forced sale. Thirdly, interest on the first mortgage continues to run. At the non-default rate, interest runs at about $73,000 per month. At the default rate of 14 per cent, interest would be running at about $100,000 per month. Any higher price achieved through a more extensive marketing campaign is likely to be offset by the increased debt to the first mortgagee.

27 Accordingly, I am satisfied that this is an appropriate case for the making of a judicial order for sale of the property. It is not disputed, and it is consistent with Palk & Anor v Mortgage Services Funding Plc, that such a sale can be directed by directing sale pursuant to the existing contract between the plaintiff and its purchaser. However, as Sir Donald Nicholls V-C said in Palk v Mortgage Services Funding Plc, although a mortgagee cannot buy a property from itself, where a sale is directed by the Court, a mortgagee can purchase the property.

28 The second mortgagees should have the opportunity to back their judgment that a higher price could be achieved by having the opportunity themselves, if they wish to exercise it, to acquire the property at the price which has now been agreed upon. They have not sought to avail themselves of such an opportunity to date. If they were to do so, they would have to do so within what is now the very limited time for completing the sale to 44 New Beach Road Pty Limited.

29 The parties have generally agreed upon the terms of short minutes which should be made, although it was agreed that some amendments would be needed to be made to the proposed short minutes to accommodate the offer made by the purchaser yesterday.

30 I will stand the matter down for the parties to bring in short minutes of order to accommodate that matter, and also, if the second mortgagees do wish to purchase the property, to enable provision for that to be included in the short minutes.

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