Permanent Trustee Co Ltd v Keogh

[1999] NSWSC 716

CITATION:	Permanent Trustee Co Ltd & Anor v Keogh & Ors [1999] NSWSC 716
CURRENT JURISDICTION:	Common Law Division
FILE NUMBER(S):	CLD 15225/92
HEARING DATE(S):	21, 22, 23, 24 June 1999
JUDGMENT DATE:	22 July 1999
PARTIES :	Permanent Trustee Company Limited, Morlend Finance Corporation (Vic) Pty Limited v R.V. Dimond (Valuations) Pty Limited and R.V. Dimond (Sales) Pty Limited trading as Dimonds First National, J. Daczko, R.J. Joice and Stuart Rowan
JUDGMENT OF:	Davies AJ at 1

COUNSEL :	Plaintiffs: T.S. Hale Defendants 4-7: M.T. McCulloch
SOLICITORS:	Plaintiffs: Watson Mangioni Defendants 4-7: Murray Stewart & Fogarty
CATCHWORDS:	Damages; Negligence; Property valuation for the purpose of loan; Failure to take into account Council order under s 310(b) of the Local Government Act 1919 (NSW)
ACTS CITED:	Local Government Act 1919 (NSW)
DECISION:	Judgment for the plaintiffs

THE SUPREME COURT

OF NEW SOUTH WALES

COMMON LAW DIVISION

CLD 15225/92

DAVIES AJ

Thursday, 22 July 1999


PERMANENT TRUSTEE COMPANY LIMITED & ANOR

v KEOGH & ORS

REASONS

1 HIS HONOUR: When the proceedings commenced, the plaintiffs, Permanent Trustee Company Limited and Morlend Finance Corporation (Vic) Pty Limited, who were financiers, claimed that they had suffered damages as the result of negligence on the part of a firm of solicitors and on the part of a firm of valuers. The solicitors are no longer involved in the proceedings. The claim against the valuers, the defendants, is based on the contention that they failed to obtain and to refer to in their valuation an order by the Penrith City Council made under section 310(b) of the Local Government Act 1919 (NSW). 2 The plaintiffs lent money on the security of a property which was occupied at the time of the loan by a tenant. The notice, of which they were not aware and which was not brought to their attention by the defendants, was a notice that, unless the proprietors carried out certain works within a period of 28 days, recommendations would to be made to institute legal proceedings for breach. The notice specified 23 matters to be complied with, the first of which was to complete the buildings in accordance with the approved plans and specifications. Clause 11 referred to condition 652 of the Building Approval which required that the construction works be completed to the Council's satisfaction prior to occupation of the building or issue of the certificate of compliance. 3 The issue as to whether the valuers had been negligent in failing to become aware of that notice and in failing to advise the plaintiffs of it and as to whether loss resulted therefrom was referred to a referee, Mr W H Nicholas QC. The referee found in favour of the plaintiffs on the issue of liability in that he found that there was a duty on the valuers to make adequate enquiries and to inform the plaintiffs of the existence of the notice, which they failed to do. 4 Another basis of liability which had been alleged, that the valuers were in doubt about the validity of their figures, was rejected. In the course of dealing with that ground, the referee said:

“ I am not satisfied that Mr Daczko did, as a matter of fact, have any doubt that the figures advised in the letter to FML of 8th October 1990 were correct. I accept his evidence in cross-examination that, after investigation, he had no doubts about the valuation. Furthermore, there was no evidence through Mr Robertson, or otherwise, by way of challenge to the valuation, the methodology, or to the adequacy and relevance of the comparable sales information obtained . For example, there was neither evidence nor submission to the effect that the figure of $1.9 million was wrong. ” (emphasis added)

5    On the question of reliance and causation the referee found in favour of the defendants. The referee said:

“ As a matter of probability I find that the decision to approve and proceed with the transaction was dependent upon satisfaction as to valuation, tenancy, the financial viability of the borrower, and availability of mortgage insurance. The information obtained resulted in satisfaction as to those matters. Any question as to if, when, and in what circumstances the building would be completed was never raised as a matter of concern although from the outset there was opportunity to do so and to investigate it. My conclusion is that such a question never was, nor would have been, a matter relevant to the decision to proceed either on the part of Mr McKay or of Mr Landy.

....

I have already stated that I found Mr Landy to be an unreliable witness. I am bound to say that I do not accept as the truth his evidence that had he become aware of the Notice he simply would not have proceeded.”

6    The referee's report came before Simpson J. Her Honour accepted much of the report but she came to the view that the referee had not addressed what she described as two important and related issues on the question of reliance and causation. Her Honour said on the first issue:

“The first of these is the impact on the saleability - and therefore the value - of the properties of the existence of the notice as distinct from the existence of the outstanding work. There is, in my view, a qualitative difference between recognising and accepting that a development is incomplete, and recognising and accepting that a development is incomplete and is the subject of a notice from a local government authority requiring its completion within a specified (and short) time, non compliance with which will or might result in the application of sanctions, including loss of the right to occupy.”

On the second issue her Honour said:
“The second issue not addressed flows from that and concerns the right to occupy. The referee found that the decision by the plaintiffs to proceed with the loans was dependent upon their satisfaction as to, inter alia, valuation and tenancy. The reasons for their interest in the security of the tenancy are obvious. It has a bearing on resale value, and presumably a bearing on the borrowers' capacity to meet their obligations under the loan agreements. There was evidence that the referee was entitled to and did accept that the existence of the notice had no bearing on valuation (although it is a rather surprising view). But, in the light of the express threat to the right to occupy contained in paragraph 11 of the attachment, he could not reasonably have come to the view that, even with knowledge of the existence of the notice, the plaintiffs would have regarded the tenancy as secure and the existence of the notice as immaterial to their decision to lend.”

7 It seems to me that her Honour had in mind by those two issues that there was a question as to the significance of the s 310(b) order and that the answer to that could not be resolved by reference only to the matters to which the referee referred, namely, that the officers of the finance company, Mr McKay and Mr Landy, had at the time been satisfied as to valuation, tenancy, the financial viability of the borrower and the availability of the mortgage insurance, and had been aware that there were works still to be done. Her Honour considered that there were issues as to the significance of the s 310(b) notice that ought to be examined. One was what effect the notice and the works the subject of the notice had on saleability and the second was what effect they had on what I would call the risk. The specific element of risk to which her Honour referred was the possibility of interference with the right to occupy as a result of action on the part of the Council. 8 The formal order of the Court contained these provisions:

“ 1. That the report of Mr W H Nicholas, QC dated 7 April 1997 be adopted only as to his findings that:
(a) in failing to discover the s 310 Notices and to advise FML of its effects, the Fourth to Seventh Defendants were negligent and in breach of their retainer;
(b) the Plaintiffs had failed to establish as against the Fourth to Seventh Defendants that in breach of their retainer and of duty the valuation was made negligently;
..........
7. That the Plaintiffs' claim against the Fourth to Seventh Defendants be listed for hearing as to damages, including the issues of reliance and causation.”

There is a tension between the matters stated in pars 1(a) and 7 of the order and that stated in par 1(b) for if the s 310(b) notice was a relevant matter one would think that, ordinarily, it would be relevant to the valuation and therefore, if the valuation did not refer to it in some way, the valuation itself would have been negligently done.

9 In my opinion, the orders follow the pattern that, before the referee, the plaintiff did not call any express evidence going either to the quantum expressed in the valuation or to the general methodology used in the valuation. Therefore it is not open, by reason of order 1(b), for the plaintiff to call evidence directly attacking the valuation as such. However, it seems to me there is still the issue as to the s 310(b) notice and its significance and it is that matter which her Honour has sent off for trial and it is that matter which I am now considering. It seems to me that I should not put artificial restrictions on that issue simply because evidence about it may touch upon the valuation. 10 A contention throughout the trial has been that, in her reasons, Simpson J accepted that the referee was entitled to and did accept that the valuation had not been negligently done and that, by reason of order 1(b), that issue is entirely foreclosed. Counsel for the defendants, Mr McCulloch, said that, before the referee, the defendant Daczko gave evidence that the s 310(b) notice would have had no effect upon value. Whether he did or did not I do not know, but it may be that that was the basis of her Honour’s comment which I have set out above. Mr McCulloch proceeded from that point to say, in effect, that it could not be contended that the s 310(b) notice had any financial implications, excepting of course to the recipient of the notice. He submitted that that matter had been determined against the plaintiffs by the decision of the referee and by the order which her Honour made. 11 In my opinion, her Honour left open issues of saleability and risk arising from the existence of the s 310(b) notice and ordered that those matters be determined in these present proceedings. It follows that the Court is not bound by evidence which is not now before the Court and which Mr Daczko may have given to the referee. The parties are precluded from making any direct challenge to the valuation for that issue has by virtue of the referee’s findings and her Honour’s order 1(b) been determined in favour of the defendants. However, the plaintiffs are not precluded from adducing evidence as to the implications of the s 310(b) notice. Insofar as the evidence shows that the s 310(b) notice had monetary implications with respect both to the saleability of the property and its risk as a security, then that evidence goes directly to the issue specified in orders 1(a) and 7, which her Honour has set aside for trial. Such evidence does not become irrelevant or outside the ambit of the inquiry merely because there may be an inference from it, even a necessary implication, that the valuation should have referred to the s 310(b) notice and been qualified accordingly. It is the purpose for which the evidence is tendered and received which is important not the totality of its ramifications. 12 I shall commence by mentioning first the evidence given by persons other than officers of the plaintiffs. The evidence given by Mr Daczko before the referee is not before the Court and no evidence has been given by any of the defendants. Mr McCulloch called Mr S.J. Pillon, an officer of the Penrith Council who was, in 1990, the District Health and Building Surveyor of the Council and who, in company with officers of the Council’s Planning Department and engineers of the Council, carried out the building inspection which took place prior to the issue of the s 310(b) notice. Mr Pillon described the Council’s practice with respect to enforcement of such notices as follows:

“ The Council’s usual practice with developments is to ensure they are completed in accordance with the approval and one of the ways of ensuring that happens is to, at the stage of issuing a notice and prior to taking legal action, would have been to negotiate amicably a solution by way of resolving these issues. Generally by taking legal action it would not have resolved compliance with those requirements so it is general practice to try and resolve outstanding items as best as possible.
...
A. I don’t think I can give an answer as to the time frame of how long Council would have allowed completion of the works but certainly some indication of a schedule and a time frame would have been entertained within a reasonable time frame. ”

Later in his evidence, Mr Pillon said that legal proceedings were usually taken as a last resort. Mr Pillon said that the items specified in the s 310(b) notice involved aspects of both the building approval and the development approval. He said that, in fact, no further action was taken by the Council until the property was put up for sale in late 1992 and that, on 9 October 1992, the Council served two further notices, a notice under s 310(b) of the Local Government Act and one under s 317D of the Act, having similar effect to the notice with which we are concerned.

13 This evidence was relied upon by Mr McCulloch to say that the Council would, in 1989, have been prepared to negotiate time to complete the works. I accept that point. 14 Mr N.J. Moses, a solicitor called on behalf of the plaintiffs gave this evidence as to the significance of a s 310(b) notice:

“ Well the existence of a notice under 310B of the Local Government Act which then applied was a matter which in normal circumstances would reduce the value of the property and it would be normal for a solicitor to say to his client, if the client were relying on the solicitor for that sort of commercial advice, “Look, the fact that this notice is issued means that if you ever have to realise this security you are going to have difficulty in doing so unless the notice has been complied with and as your ultimate security is the property and the ability to sell the property to recover your money if there is default under the mortgage, you ought to ensure before lending the money that the notice has been complied with so that a purchaser will not object to the existence of the notice on the sale of the property. ”

15 The effect of this evidence, which I accept, is that a s 310(b) notice is a matter which a solicitor would advise had implications as to the saleability of the property to be mortgaged and as to the risk of the security. 16 Mr McCulloch did not cross-examine Mr Moses but pointed out that, if the defendants had brought the notice to the attention of the plaintiffs, they would have done so prior to the plaintiffs engaging a solicitor in the matter. He submitted that the plaintiffs would have spoken to the defendants about the notice rather than a solicitor. The point seems to me to be not significant. I would expect both valuers and solicitors to take a like view of a s 310(b) notice, for their work brings them into contact with such notices and with the views which valuers and solicitors take in respect of them. 17 Mr T.S. Hale, counsel for the plaintiffs, tendered a statement from Mr J.D. Robertson, a valuer who earlier had given evidence before the referee. Mr Robertson, who was not cross-examined, stated that if a s 310(b) notice came to the attention of a valuer, the valuer would need to examine the notice and obtain a costing of the works required to be undertaken in order to ensure that the building complied with the Council’s requirements. He said that, in preparing a valuation with knowledge of the notice, a valuer could approach the matter in either of two ways as follows:

“ (a) The value can be provided ‘on completion’ of all works being rectified, with a costing advised. Presumably, the lender would then ascertain from the borrower where the source of funds were to be obtained to complete outstanding works.
(b) The value can be provided on an ‘as is’ basis, ie:-
Value of Building ‘as is’ $
Less cost to complete $
This cost may incorporate a developer’s profit. ”

Mr Robertson also stated that, if the Council were to take steps which brought to an end the occupation of the property by the tenant, those steps would have consequences for the valuation.

18 Although Mr Robertson’s statement as expressed was directed at a valuation, the statement was tendered and I received it not for the purpose of challenging the plaintiffs’ valuation but for the purpose of determining the significance of the s 310(b) notice on saleability and risk. In my opinion, the effect of Mr Robertson’s statement is that a s 310(b) notice has significant implications in this respect. 19 I now turn to consider how the officers of the plaintiffs, a Mr Landy, a Mr McKay and a Mr Grecian, would have reacted to the s 310(b) notice had they become aware of it. 20 It is not in dispute that the plaintiffs were, as the referee found, satisfied in 1990 of the valuation, the tenancy, the financial viability of the borrower and the availability of mortgage insurance. The matter commenced with a finance proposal sent on behalf Bewika Pty Limited (“Bewika”) to Mr Landy and Permanent Trustee on 23 May 1990. The letter proposed a three stage financing of the subject property and adjacent land, of which stage one required finance of $1.2 million, the property said to be valued at $2 million. I need not mention stages two and three which were not given consideration by the plaintiffs. Under the heading “Stage Two” was a note stating:

“ To provide construction finance for expansion.
The proposed expansion will provide a further 40,000 square feet of storage space to which a lease has been prearranged with Trio Trailers (refer letter attached) at $4.00 a square foot. This lease is to be provided before drawdown of Stage Two.
a) To provide construction finance for extension to existing depot (prefabricated - $947,000).
b) To provide costs to have Stage One comply with Penrith Council requirements in preparation of extension. $133,800
Total Stage Two: $1,080,800. ” (emphasis added)

21    It was put in cross-examination to Mr Landy and Mr McKay, who gave evidence on behalf of the plaintiffs, that they must have understood when they read this that there was an outstanding requirement by the Penrith Council respecting work to be done on the subject property. Mr Landy and Mr McKay said that they did not understand the letter in that way. I accept their evidence. I would not read the letter in that manner, although it may raise a doubt in an inquiring mind. The passage appeared in a section which was headed Stage Two and under the words “To provide construction finance for expansion”. 22    On the letterhead of Forward Mortgages Group (“FMG”), whose relationship with the plaintiffs was not clearly explained, Mr Grecian wrote a favourable letter to Bewika setting out an “Indicative Offer”, stating that the amount of the loan was to be $1.2 million for three years and that there was to be an independent valuation of the property of not less than $2 million and stating also that written acceptance by a mortgage insurer was required for such of the principal sum as exceeded 50% of the valuation. 23    The valuation by the defendants, of whom Mr Daczko was the valuer for the purposes of the valuation, was dated 15 June 1990 and was received on 19 June. Amongst other information the following matters were stated:

“ It was evident at the time of our inspection that the building is yet to be completed with inclusion of amenities and an office area.
Discussions with the owner indicated a further $200,000 would be required to complete these items.
...
The subject building has recently been constructed and was found to be in good condition. As mentioned previously there are no amenities or offices available within the building however these are proposed. ”

The valuation valued the property at $1.9 million. The valuation was arrived at in two ways, first, by valuing the land from comparable sales, adding the cost of the improvements and depreciating the total by 15% to reflect a fall in the market which had occurred. Secondly, the valuation capitalised the anticipated rental. Both methods arrived at $1.9 million. I mention these matters not with a view to discussing the valuation as a valuation, but to indicate the information that was before the officers of the plaintiffs.

24    As the Permanent Trustee Company lent up to only 50% of valuation without obtaining mortgage insurance, Mr Grecian wrote on 20 June 1990 to Australian Mortgage Insurance Corporation Ltd seeking insurance for the balance to be lent over the 50%. In a subsequent letter dated 25 June 1990 Mr Grecian wrote:

“ With regard to the valuer comment regarding works to be completed we advise that these works will be and only required by the Council, if our client proceeds with a further redevelopment of our proposed security. We enclose relevant Section 317AE Certificate applicable to the site. Our valuer has ignored these works in his calculations but has advised that these works to be completed would not detract or stop sale of the property at his figure. ”

As can be seen Mr Grecian put together the information which was contained in the application for finance with respect to stage two and information which came from Mr Daczko that the works to be completed would not detract from or stop the sale of the property. Mr Grecian did not give evidence; but it is clear from that letter of 25 June 1990 that he was under a misapprehension as to the situation with the incompleted works, thinking that they affected only a proposed future expansion, which was not the case.

25    It is clear that Mr Grecian had been concerned about the reference in the valuation to the building being incomplete for there is a note in his handwriting of 19 June 1990 which read:

“ Spoke with John Daczko regarding valuation and $200m to complete amenities, office area and roads etc.
Land value only is $1.2m and works to be completed would not detract or stop sale of property. ”

26 Mr McKay said in his evidence in chief that, if he had been aware that the building was being occupied unlawfully, that the local council had issued the notice under s 310(b) or that work to the value of approximately $200,000 would need to be undertaken to put the building in a state where it could be lawfully occupied and used by the tenant, he would not have recommended the loan for approval. This evidence is not particularly helpful as it concentrated on the tenancy and upon the fact that it had been a term of the development approval that: “Before usage of the development commences, all of the conditions of this consent are to be complied with to Council’s satisfaction”. Although there was some risk to the tenancy, disturbance of the occupation was the least probable of the steps which the Council would have been likely to take, certainly within the three year period of the finance. 27    In his oral evidence, Mr McKay said that had he been aware of the notice:

“ I would have asked my valuer to explore the cost estimates, the quantity of the works, when they needed to be done by and what impact such works would have on our security if not done and I would have checked with my lawyer as to the probable penalties or repercussions of the work not being done. ”

When asked what he would have done if he had been informed that the Council did not have any immediate plan to carry out the threat contained in its letter, Mr McKay responded that he would have wanted that information in writing and would have referred that to Mr Landy for his final approval. Mr McKay said he would not have been concerned about the unfinished works if the borrower had been able to demonstrate that he was able to fund their completion and, if that had been the case, he would have included that point in his submissions. Mr McKay expressed the view that Bewika did not have a surplus cash position, and that on the contrary the accounts tended to show the opposite. Mr McKay conceded, however, that, on the cash flow which had been provided, Bewika would have been able to finance improvements to the value of $133,000 in the ensuing year if that sum needed to be outlaid.

28 Mr McKay gave evidence that, during the consideration of the transaction, he needed to be satisfied that the uncompleted works would not detract from the saleability of the value of the property and he said that, as he recalled it, there was a conversation between Mr Landy, Mr Grecian and himself in which Mr Landy indicated that enquiries on the topic should be made. He said he could not recall on what date it had occurred. Mr Landy said that, if he had been informed of the s 310(b) notice, he would have assessed what effect the notice had and would not have been prepared to go ahead with the loan without doing so. Mr McKay agreed that, provided the tenant could remain, he would have been satisfied with that aspect of the transaction and that the tenant was important because the rental supported the serviceability of the loan. 29 So far as I could observe, Mr McKay was a straightforward and honest witness. 30 Mr Landy was the principal decision maker for both Permanent Trustee and Morlend so far as this transaction was concerned. In his evidence in chief, Mr Landy said:

“ 8. Had I known that Penrith City Council had made orders applicable to the security properties under section 310 of The Local Government Act, I would have immediately recognised that there was a risk:
(a) that unless these works were undertaken immediately, the Council would be in a position to close down the premises and thereby cut off the rent with the consequence that the tenant, having no right to occupy, would depart and significantly reduce the value of the property as security for the loans.
(b) that Bewika would not be in a position itself to borrow or advance the $200,000 required to comply with Council requirements because the circumstances of the advances by the plaintiffs was to discharge all the prior liabilities of Bewika Pty Limited and that out of the plaintiffs advances, no funds were to be paid to Bewika. The advances by both of the plaintiffs were at the limits of their respective margins of loan to value ratios. The plaintiffs would have been in the invidious position if the council was to enforce immediate completion of the amenities and office area of having to either advance the additional funds to preserve the security which would have been in breach of the loan to value ratios or risk losing the tenant; and
(c) that the value of the property would have been detrimentally affected. ”

31    It is clear that Mr Landy was, at the time, concerned that the building was unfinished, for noted in his handwriting on the defendants’ valuation are the questions “What items to be considered? What impact on saleability?”. On the settlement sheet concerning the Permanent Trustee loan, Mr Landy noted on 1 August 1990 under “Conditions Precedent to Settlement” the words “Subject to letter from valuer re value ... no amenities or office”. There was a similar notation on Morlend’s settlement sheet. On 15 August 1990, in answer to enquiries made, a letter was sent from Mr Daczko to FMG, attention Mr McKay, stating that discussion with the Penrith City Council revealed that a s 317AE certificate would issue over an existing building regardless whether amenities were on site or not. 32    In his written statement, Mr Landy said that, a day or two after receiving the valuation he telephoned Mr Stuart Rowan, the principal of the defendants’ firm, and asked about the $200,000, the cost of the amenities, and what impact this had. He said that Mr Rowan went away to examine the matter and, after four to five minutes, he returned to say that it had no impact on the value. Mr Landy had earlier been cross-examined on this statement before the referee and, in the course of that cross-examination, had agreed that the time of the conversation was incorrect. In this Court he corrected the time to 1 August 1990. 33    If anything turned on that conversation, it might be difficult to decide if or when it occurred or what the precise terms of the conversation were. However, the conversation is not important. Mr Landy’s notations on the valuation itself and on the settlement sheets show that at the time he was concerned about the impact of the unfinished work. Mr Landy agreed in cross-examination that it was his recollection that he gave a direction for the two questions which he noted on the valuation to be asked of the valuer and that he gave that direction to Mr McKay and Mr Grecian while they were both present. Mr Landy said in his cross-examination that “The impact on saleability was a critical issue to me”. 34 Having heard Mr Landy in the witness box and considered the transcript of his evidence, I have concluded that he was an honest witness notwithstanding that his recollection may well have been faulty about the discussion with Mr Rowan, which may have concerned another property. I consider that, in general, the answers he gave in cross-examination were straightforward and cogent. 35 There are several factors which tend to favour the view that the plaintiffs may have entered into the transaction even if they had been aware of the s 310(b) certificate. One is that the plaintiffs were happy to accept the risks of the transaction as they saw them. Another is that this was the first transaction in which the plaintiffs had cooperated with FMG. Perhaps both the plaintiffs and FMG were anxious to see that the transaction went through smoothly. Certainly, the application of 23 May was responded to promptly by Mr Grecian on the letterhead of FMG on 24 May. A third point is that the plaintiffs may have been pleased with the transaction as it was ultimately formulated. Originally, Bewika had sought $1.2 million. It was at first proposed that Permanent would lend that sum. However, the transaction was restructured so that Permanent lent $1 million at its interest rate of 1.75% over the bank rate if interest was paid within seven days of the due date and Morlend lent $330,000 on a second mortgage at an interest rate of 23%, the interest of $75,900 being paid in advance on the making of the loan. Morlend’s return may have seemed quite attractive having regard to the fact that its loan was for twelve months only. 36 Another aspect is that the plaintiffs were satisfied, principally from the accounts including the balance sheet and a cash flow statement, that Bewika would be able to meet its obligations under the loan agreements. As it was known that the totality of the loans would go to pay out existing liabilities and as the letter of 25 June 1990 from Mr Grecian referred to a winding up petition which had been withdrawn, one may surmise that the plaintiffs were unwise to take notice of the accounts presented to them. However, they did so and were satisfied with the accounts and with the enquiries which they made. For example they were informed by Esanda Finance that Bewika had twenty-two accounts with Esanda and that the conduct of the accounts since inception had been satisfactory. 37 Another factor, is that the tenant of the land was SCI Operations Pty Limited, which was a responsible tenant in occupation of the land under a lease which provided for a rental adequate to meet the ongoing payments due under the loans. Another factor, as shown by its preparedness to enter into the transaction with Morlend, is that Bewika was prepared to do all that it could do to obtain the funds which it wanted from the plaintiffs. 38 However, there were factors tending in the opposite direction. One is that Mr Landy and Mr McKay appear to have been careful and methodical. On Mr Landy’s part, one can see this in the handwritten notes to which I have already referred. On Mr McKay’s part, one can see it in the detailed instructions which he gave to the defendants when he requested a valuation. Similarly, the letter to Cohen Brown, the plaintiffs solicitors who acted in the transaction, which was prepared by Mr Grecian but signed by Mr Landy, was extremely detailed being seven pages in length. It was put by Mr McCulloch in cross-examination of Mr Landy and Mr McKay that, if they had been informed of the s 310(b) notice, they would have gone ahead with the transaction without giving the matter much attention. That contention was rejected by the witnesses. My own view of them is that, had the s 310(b) notice been brought to their attention, they would have given it serious consideration and would not have gone ahead with the transaction unless they had been satisfied that arrangements were in place to overcome its problems. 39 Another factor is that the s 310(b) notice in fact impacted upon both saleability and risk. Another is that the mere existence of the s 310(b) notice would have tended to alert the plaintiffs to the parlous financial state of Bewika. It is one thing not to have completed some extensions that were planned. It is another thing not have completed a building in accordance with the conditions laid down for its construction. It is likely that the plaintiffs would have become aware that Bewika had not been able to complete their building in accordance with the development approval and building permit because they did not have the funds to do so. I infer from the material before the Court that Bewika was in fact in a parlous financial situation because it was not long after, in May of 1991, that Bewika was wound up on the petition of the Deputy Commissioner of Taxation. The true position with respect to Bewika’s tax affairs could not have been made known to the plaintiffs. 40 The next and perhaps the most important factor is that Bewika did not have the funds to complete the construction of its development and it could not borrow those sums from the plaintiffs. The plaintiffs had lent all that they could lend, $1,330,000 on a valuation of $1.9 million, having regard to the terms of the trust deeds under which the plaintiffs operated. Moreover Permanent could not under its trust deed lend on an uncompleted development. There may have been a question as to whether Permanent could have lent the $1 million if it was aware of the existence of the s 310(b) notice. 41 Mr McCulloch has submitted that Bewika could have negotiated time with Penrith Council and could have come to an agreement with the Penrith Council to have completed the work within twelve months. It can be accepted that Bewika would certainly have been prepared to enter into such an arrangement with the Penrith Council and that probably the Penrith Council would have considered that the completion within twelve months of at least some of the items was reasonable. Mr McCulloch also obtained a concession from Mr McKay that, on the cash flows which had been presented to the plaintiffs, Bewika would have been able to spend $133,000 on completing the development. The balance sheets and cash flow showed an adequate financial position to enable them to do that. However, Bewika’s financial position was much worse than its published accounts and the cash flow showed. 42 Another factor is that Mr McKay and Mr Landy were in fact concerned about the unfinished state of the building and were not prepared to go ahead until they were satisfied by Mr Daczko that the failure to complete did not affect saleability or the value of the property. Had the s 310(b) notice been brought to the attention of the plaintiffs, they would have made enquiries of the defendants. On the evidence of Mr Moses and Mr Robertson, the defendants ought to have replied in a way which effectively qualified their valuation, for they should have said that the plaintiffs should ensure that Bewika did the work before making the loan or that the cost of the work should be taken into account in assessing the security. 43 The issue is a difficult one, but I have come to the view that the loans would not have gone ahead had the defendants brought the s 310(b) notice to the attention of the plaintiffs. I have come to that conclusion mainly because I think that the plaintiffs would have required an unqualified valuation of $1.9 million before the loan was made and also because the existence of the s 310(b) notice would have alerted the plaintiffs to the desperate straits that Bewika was in. The plaintiffs would not have been satisfied merely by protestations on Bewika’s part that it could complete the development in accordance with the s 310(b) notice. The plaintiffs would have required to be satisfied that all matters in relation to the valuation had been clarified and that they were entitled to act in accordance with the valuation which was before them. In my opinion, if the s 310(b) notice had been brought to the attention of the plaintiffs and of the defendants, it would not have been the case that there was an unqualified valuation for $1.9 million or that Bewika could readily overcome the problem. 44 As I have earlier mentioned, the purpose of these proceedings is to ascertain the significance of the s 310(b) notice. I am not purporting to hold and I do not hold that the defendants were negligent in their valuation. That is not an issue before me. But it is necessary that I consider what would have happened had the s 310(b) notice been known to the defendants and brought to the attention of the plaintiffs. I have formed the opinion that it is not likely that the transaction would have gone ahead. 45 The conclusion at which I have arrived is confirmed by subsequent events. Thus, in 1991, the defendants again valued the subject property. In a valuation by Mr J D Smith which accompanied a letter dated 22 August 1991, the following information was contained:

“ Our valuation is subject to the conditions contained in the lease over the property. We note the existing use does not comply with council and that as the building is incomplete the owner does not have the right to occupy the premises. ”

The valuation itself proceeded upon a capitalisation of the rental less the cost of completion, which was stated in the valuation at $159,000. So one can see that, by the middle of 1991, the defendants themselves took the s 310(b) notice into account as a qualification on value.

46 The property was auctioned on 30 October 1992. Enquiries of the Council as to the property were made by interested purchasers. As a result, fresh notices issued under s 310(b) and 317D of the Local Government Act. The totality of the two notices was similar to the notice issued in 1990. There is a note from Colliers Jardine, Valuers and Real Estate Agents, on 23 October 1992, that the Council had advised that the s 149 certificates should have shown the s 317D notice and that the Council had advised all parties that sought a s 149 certificate of the omission. 47 As the auction approached, interest in the property was poor. A letter from L J Hooker of Penrith to Ray White Project Marketing of 16 October 1992 said that the positive interest in the property was disappointing. The letter went on to say:

“ The list of non-compliance requisitions require substantial structural and site works and it is difficult to quantify the ‘cost to complete’ in monetary terms. Feedback is $250,000-$400,000. ”

I do not suggest that the figures there mentioned were the moneys ultimately required to comply with the Council’s requirements. I assume that the sum required was much less. However, the letter confirms that the existence of the notices had an effect upon saleability and that purchasers were discouraged.

48 In the circumstances, I am satisfied that the plaintiffs are entitled to damages in respect of the defendants’ failure to ascertain the existence of the s 310(b) notice and to bring it to their attention. 49 The damages are agreed as follows:

A. First plaintiff - Permanent Trustee Company.
As at 20 June 1999
(a) Principal and interest on the loan $584,601
(b) Costs incurred in connection with the enforcement of the security $ 31,436
(c) Interest on costs referred to in (b) $ 25,697

TOTAL loss as at 20 June 1999 $641,734

Continuing interest from 20 June 1999
(a) Principal $105 per day

(b) On costs $ 8 per day

B. Second Plaintiff - Morelend Finance Corporation (Vic) Pty Ltd
As at 20 June 1999
(a) Loan principal $254,100

(b) Interest on loan principal $947,136

(c) Costs incurred in connection with the enforcement of the security $ 24,617

(d) Interest on costs referred to in (c) $ 18,386

TOTAL loss as at 20 June 1999 $1,244,239

Continuing interest from 20 June 1999

(a) On loan principal $596 per day

(b) On costs $ 6 per day

50    The defendants submit that the plaintiffs should have minimised their losses by accepting an offer of $1 million received from Esanda Finance on 8 May 1992. The offer was conditional upon Esanda becoming the registered first and second mortgagee. Mr Landy has given evidence that the offer was an indicative offer only, that there were subsequent talks and that the matter petered out. It seems likely that a problem arose from the fact that the offer would have satisfied Permanent but left nothing for Morlend or its mortgage insurer. A consensual transaction could not have gone ahead without Morlend’s consent. I assume that this was not forthcoming because Morlend had to answer to those who had an interest in its affairs and also to its mortgage insurer, which on 18 June 1992 expressed annoyance that the offer was being considered. Although Permanent and Morlend used the same staff, Mr Landy, Mr McKay and Mr Grecian, they were unrelated companies. It seems to me to be likely that the only practicable course was to put the property to auction, which occurred later in the year. I see no basis for holding that the plaintiffs failed to take reasonable steps to minimise their damages. 51    There will be judgment for Permanent Trustee Company Limited against the defendants in the sum of $645,350.00 and for Morlend Finance Corporation (Vic) Pty Limited against the defendants in the sum of $1,263,503.00. 52    I have been asked to reserve the question of costs. The plaintiffs’ submission should be filed and delivered within ten days. The defendants’ response should be filed and delivered within ten days thereafter.

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Last Modified: 09/09/1999