Stone v Farrow Mortgage Services (in liq)

[1999] NSWCA 435

Reported Decision: (2000) NSW ConvR 55-929

New South Wales

Court of Appeal

CITATION:	Stone v Farrow Mortgage [1999] NSWCA 435
FILE NUMBER(S):	CA 40353/97
HEARING DATE(S):	28 July 1999
JUDGMENT DATE:	3 December 1999
PARTIES :	Appellant- George Barry Everett Stone Respondent- Farrow Mortgage Services (In Liquidation)
JUDGMENT OF:	Meagher JA at 1; Hodgson CJinEq at 2; Cole AJA at 19

LOWER COURT JURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S) :	50019/94
LOWER COURT JUDICIAL OFFICER:	Bainton J

COUNSEL:	Appellant- Mr Stone (litigant in person) Respondent- Mr J E Marshall / Mr White
SOLICITORS:	Appellant- Mr Stone (litigant in person) Respondent- Abbott Tout
CATCHWORDS:	Mortgages; Exercise of power of sale; Mortgagor claiming damages; Breach of duty not shown
CASES CITED:	Kennedy v De Trafford (1897) AC 180 at 185 Forsyth v Blundell;(1973) 123 CLR 477 at 481.493 Australia & New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 222
DECISION:	Appeal dismissed with costs

THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA40353/97

MEAGHER, JA
HODGSON, CJ in Eq.
COLE, AJA

FRIDAY 3 DECEMBER 1999

GEORGE BARRY EVERETT STONE v FARROW MORTGAGE SERVICES PTY LIMITED (In Liquidation)

JUDGMENT

1   MEAGHER JA: I agree with the judgments of Hodgson CJ in Eq. And Cole AJA. 2   HODGSON, CJ in Eq.: The circumstances of this matter are set out in the judgment of Cole, AJA. I agree with Cole, AJA that this appeal should be dismissed, substantially for the reasons he advances. I would add the following reasons of my own. 3   The only real issue in the appeal is whether or not the respondent breached its duty to the appellant in relation to the sale of the appellant's property 2A Duke Place, Balmain. To show such a breach of duty, the appellant must show at least that the respondent failed either to act in good faith or to act with reasonable skill and care or to take reasonably adequate steps to ensure a fair price in relation to the sale. The circumstance, if it be the case, that the sale was at an undervalue is not of itself sufficient. 4   In such a case, there are two broad areas of enquiry: first, what steps were taken in relation to the sale; and second, the comparison between the sale price and the true value of the property. These areas are interdependent. A price actually obtained after proper steps have been taken is strong evidence of the true value of the property. On the other hand, if it is proved that the price obtained is substantially below the true value, that may be some evidence that proper steps were not taken. The relationship between the price obtained and the true value is also relevant in that, if it is shown that the duty has been breached, the measure of damages is the difference between the sale price and the true value; and if there is no difference, there is no remedy. 5   In this case, the appellant addressed both areas of enquiry, and the trial judge's findings in both areas. I will deal first with the appellant's case in relation to the steps taken in relation to the sale. 6   The appellant relied on evidence from Mr. Gardner that the date chosen for the auction of the property was "not ideal"; and evidence from Mr. Hennessy that the advertising did not give sufficient time for a "full listing and awareness of the market". However, it is plainly not a breach of duty to auction a property on a date which is "not ideal". In relation to Mr. Hennessy, it is plain that his opinion was based on wrong information as to the period of advertising for the auction: his opinion was based on information that the auction had been advertised for only two Saturdays, whereas in fact it had been advertised for three Saturdays. Furthermore, there is no suggestion that Mr. Hennessy took into account the previous history of marketing of the property, set out in the judgment of Cole, AJA. 7   Next, there was criticism of one advertisement of the property, which had the heading "Developers/Dealers/Bargain Hunters and Thieves". However, there was no expert evidence that this was likely to depress the price obtained on an auction. Mr. Coleman, the person having the main conduct of the marketing of the property, and a person with experience in the real estate industry since 1979, considered it an appropriate advertisement, and no ground is shown for rejecting that view. 8   Next, it was submitted that, when the under-bidder at the auction came up with an offer of $580,000.00, the agent should not have merely obtained a matching offer from the ultimate purchaser, but should have taken steps to get a better offer. In fact, the agent sought from each of the two candidates its best offer, and in my opinion no ground is made out that that was inappropriate. 9   In the course of oral submissions, the appellant Mr. Stone sought to make out that bad faith was exhibited by the agent, in that it was attempting to dispose of the property to builder friends at a low price; and Mr. Stone referred to an incident when the principal of the agent passed keys of the property to the builder and said "Here are the keys. It's as good as yours". However, Mr. Stone was not able to say whether there was any evidence of that before the trial judge; and on closer examination, it appeared that the only material relating to that incident was a letter written by Mr. Stone, which had been tendered in evidence before the trial judge and rejected. In that letter, dated 11th February 1991, Mr. Stone described an incident where an Elders agent passed keys to a builder saying "Here, you will probably need these now". Complaint was made about the rejection of that letter, but in my opinion that material could not conceivably go to bad faith on behalf of the agent. It is perhaps worth noting that in the same letter, Mr. Stone made the point to the respondent that the under-bidder, who had offered $580,000.00 for the property, did not want to get into a "duelling bid"; a remark that does not sit well with the previous complaint that I considered. 10   Next, Mr. Stone sought to rely on a memorandum, apparently from the file of the agent, referring to an offer from Mr. Stone's brother for the property of $875,000.00. It appears that that memorandum was not in evidence before the trial judge, and there is no material before us to satisfy us that it was not reasonably available to be led. In any event, it is highly unlikely that this would have made any difference to the case. Having regard to the history of the involvement of the appellant's brother in the attempts to market the property, it is unlikely in the extreme that he would have purchased the property for $875,000.00. 11   Accordingly, it seems to me that none of these complaints concerning the steps taken and the way the trial judge dealt with the steps taken are made out. 12   Turning to the valuation question, Mr. Stone submitted that the trial judge was in error in rejecting evidence concerning special value of the property to the owner. It is quite plain that this decision of the trial judge was correct: the evidence of the valuer Mr. Phippen concerning an alleged special value to Mr. Stone of the property of $470,000.00 had absolutely nothing to do with the market value of the property or the duty of the mortgagee. 13   It was submitted that the trial judge was in error in rejecting Mr. Phippen's valuation of $1.065 million. However, as set out in the judge of Cole, AJA, the whole history of the marketing of the property strongly supports the view that its true value approximated the price of $580,000.00 which was in fact obtained. That alone could justify rejection of Mr. Phippen's valuation. 14   Part of this history concerned efforts to market the property prior to the auction campaign itself. As recorded by Cole, AJA, there was an auction held on 27th April 1990, at which no bids reached the reserves of $750,000.00 for the residence and $250,000.00 for the block of land. Thereafter, the property was advertised successively for $890,000.00, $795,000.00, $780,000.00 and $735,000.00, the last mentioned price being that advertised in August and September 1990. It is not made entirely clear in the evidence whether these prices were for the residence alone or for the residence and the land. In so far as advertisements are in evidence, they do not make this matter clear one way or the other. The price of $780,000.00 was represented as being a reduction from $1.8 million, and that strongly suggests that this price at least was for the residence and the land. In any event, there is no evidence of any offers of any significance being elicited, apart from the memorandum to which I referred earlier in this judgment. I note also that on 5th October 1990, the appellant's solicitors wrote a letter seeking approval to sell the residence for $670,000.00 and the land for $130,000.00. 15   There was criticism of the trial judge's reasons for rejecting Mr. Phippen's evidence, in particular his comment that, although Mr. Phippen knew that the property had been listed with several real estate agents, he did not know at what price it had been offered and did not consider that the valuation of the property had anything to do with what real estate agents were asking for it. In the context of the history of the attempted marketing of the property, the trial judge's comments can be seen as simply taking the realistic view that a long history of marketing at prices substantially lower than that given by a valuer, coupled with the lack of success of the marketing even at those lower prices, is strong evidence that the valuation is in error. 16   The trial judge was also criticised for giving, as a reason for rejecting the Phippen's valuation, the fact that Mr. Phippen had valued the property as a development proposition in circumstances where developers were not rushing to invest, without making any particular finding about that matter by reference to the evidence. However, in the light of the whole history of marketing, the reference to lack of interest by developers is plainly supported by the evidence. 17   The evidence of the respondent's valuer, Mr. Heydon, was criticised on the ground that the fact that it coincided exactly with the price received at auction showed it had been a matter of contrivance. This criticism overlooks the circumstance that a price obtained after reasonable marketing of a property is the very best evidence of value. 18   Further criticism was made of Mr. Heydon on the basis of mistakes in his evidence, in particular his assertion that the residence was a pole house, made out of second-hand materials, was in poor condition, had since been demolished, and would require substantial work for the issue of a compliance certificate. I think it is fair to say that all of those comments, apart possibly from the comment concerning the condition of the property, were mistakes. However, they were not made in Mr. Heydon's initial valuation, but in a response to Mr. Phippen's valuation; and particularly having regard to the other factors concerning valuation to which I have referred, it would be reasonable to accept Mr. Heydon's evidence that those matters would not have made any difference to his valuation. At most, they blunted his criticism of Mr. Phippen, which in any event was made out by the other matters I have mentioned. 19   For all these reasons, in addition to the matters referred to by Cole, AJA, this appeal must be dismissed with costs. 20   COLE AJA: Mr Stone has appealed against a judgment delivered by Bainton J on 23 May 1997 in which his Honour ordered Mr Stone to pay to Farrow Mortgages Services Pty Limited (In Liquidation) the sum of $1,765,853 together with costs. Mr Stone's cross-claim was dismissed. 21   The litigation arose from the failure by Mr Stone to repay a loan made by Farrow to Mr Stone on 21 December 1988 in the sum of $550,000, and a further loan of $39,306.10 made 18 September 1989, together with interest. The loans were secured by a mortgage over Mr Stone's home at 2A Duke Place, East Balmain. Following failure by Mr Stone to repay the loans and interest, Farrow exercised its power of sale under the mortgage. The judgment amount was for the balance due being the amount of the loans plus interest less the balance of proceeds of sale. 22   Before Bainton J the making of the loans was not in issue. Nor was the failure to repay them. The following matters were in issue:

(1) The correctness of the interest calculations
(2) A question whether Farrow impliedly agreed to fully fund the development on the Duke Place property
(3) Whether Farrow was a joint venture partner with Mr Stone, and
(4) Whether the interest provisions in the mortgage were void for illegality as being a penalty.

By the cross-claim, Mr Stone raised the issues:
(5) Whether the mortgage should be rectified by deleting the covenant to pay periodic interest during the term of the loan and substituting a provision that the interest be capitalised monthly

(6) Assuming that the loan agreement or mortgage was void, whether Farrow was entitled to retain the proceeds of sale of Duke Place, as well as moneys paid by Mr Stone to Farrow.

Bainton J resolved each of these issues adversely to Mr Stone.

23   The principal issue, before the trial judge however, was whether Farrow had exercised its power of sale improperly. This was variously asserted to be an exercise which was absent good faith, negligently or improperly. In essence the allegation was that the Duke Place property was sold at an undervalue. In the course of his analysis of this issue, the trial judge commented adversely on the credit of Mr Stone, and his brother, Mr Aussie Stone. His Honour also rejected the evidence of valuers called on behalf of Mr Stone regarding the value of the property at time of sale, preferring evidence called by Farrow. It is this issue which occupied much of the hearing time before the trial judge, and was the principal issue on appeal.

The Notice of Appeal

24   Although represented at the trial, Mr Stone presented the appeal in person. He filed a Notice of Appeal with appointment on 16 September 1997. It comprised 6 paragraphs. A supplementary Notice of Appeal was filed on 28 November 1997. That document contains 219 paragraphs and covers 45 pages. On 9 February 1998 Mr Stone filed an "Extension to the Supplementary Notice of Appeal". This document contained a further 185 paragraphs and was 40 pages in length. A fourth document entitled "Extension to the Supplementary Appeal" was filed on 4 February 1998 and comprised 43 paragraphs covering 6 pages., Additional documents were handed up at the hearing of the appeal. 25   The documents to which I have referred are discursive, repetitive, verbose and contain emotional language not normally found in either a Notice of Appeal or submissions. The approach adopted by Mr Stone is illustrated by para 61 of the Supplementary Notice of Appeal. It reads:

"I realise it is not Justice Bainton who is on trial here, but unfortunately I can see no alternative way of re-establishing my right to institute my cross-claim against Farrow for damages, other than to attempt to be constructively critical, of each and every instance where a non-factual statement has been made, or a false conclusion drawn, or an erroneous hypothesis espoused by either the witnesses or the judge, all of which must have contributed to Justice Bainton making the judgment which he did. At times I fear I will have to be directly critical of Justice Bainton."
and paragraph 218 of the same document reads:

"I submit to the Appeals Court that the only really effective way I can compile an appropriately-detailed index, would be for me to provide a systematic analysis of the Court Transcripts & witnesses affidavits, as I have already begun to analyse the offerings of the Judgment, with this Supplementary Appeal"..

26   Such documents would normally be struck out as not being in compliance with the rules or practice of this Court. However, in this instance, the Court received the documents as being the basis of the submissions which Mr Stone wished to advance to the Court. Those submissions were supplemented by oral submissions from Mr Stone which lasted a full day.

The minor issues

27   It is convenient to address the 6 minor issues identified before addressing the major point in the appeal

Interest

28   The interest calculations were supported by tables tendered and were apparently checked by the trial judge. The calculations were in support of a mortgage certificate. Mr Stone adduced no evidence to call in question the amount of the interest calculations.

Full funding and/or joint venture

29   No evidence was called by Mr Stone, apart from certain assertions made by him that here was either a joint venture between himself and Farrow, or that there was any agreement, express or implied, that Farrow would fully fund the development he wished to implement on the subject allotments.

Bainton J held, after reviewing the material in Mr Stone's affidavit of 1 December 1995, and documents attached to it:

"that evidence is plainly not capable of establishing the pleaded defences that Farrow agreed 'by implication' to fully fund the development to enable Mr Stone to complete the development and to proceed to market the same (the multiplicity of separate financing agreements is quite inconsistent with any such implication), or that the so called penalty interest is void ab initio due to illegality".


There is nothing to call in question that finding. Mr Stone did not allege an express agreement. That there was no joint venture agreement was plain from the evidence of Mr Stone who said: I continued to look for joint venture partners because it didn't seem I was having any luck with Farrow."

In para 69 of the Supplementary Notice of Appeal Mr Stone wrote:

"Whether there was, or was not, a Joint-venture, is probably of little consequence. I am not even appealing against this part of the Judge's finding."


It may be taken that Mr Stone has abandoned the contention that there was a joint venture arrangement. There is no substance in the contention that there was an implied agreement with Farrow that it would fully fund the development, or that Mr Stone was in a joint venture with Farrow.

Penalty

30   There was nothing advanced to support the contention that the interest obligation amounted to an unenforceable penalty. The interest rates charged were high but, as Bainton J made plain, the period between 1988 and 1990 was a period of high interest rates, particularly for persons wishing to borrow to develop property, and particularly in circumstances where Mr Stone was unable to honour obligations to repay loans such that, in an apparently declining market with an increasing debt and interest burden, the buffer of equity in the property owned by the mortgagor was decreasing.

Rectification

31   No submissions were put to suggest there was any substance in the claim that the mortgages given by Mr Stone to Farrow ought to have been rectified to delete the periodic interest payment provision and to substitute monthly capitalisations. As will appear the question of interest capitalisation was addressed in the arrangements between Mr Stone and Farrow.

Retention of payments plus proceeds of sale

32   As there was no finding that the mortgage agreement was void, this matter does not arise.

Was the property sold at an undervalue in breach of the mortgagee's obligations?

33 The mortgagee exercising a power of sale must do so in good faith. He must "not fraudulently or wilfully or recklessly … sacrifice the property of the mortgagor". See Kennedy v De Trafford (1897) AC 180 at 185; Forsyth v Blundell; (1973) 123 CLR 477 at 481. 493; Australia & New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 222.
34   Mr Stone alleged that Farrow did not exercise its power of sale as a mortgagee in good faith. That was said to be demonstrated by a rushed and inadequately advertised and marketed sale, which resulted in a price being realised which was below the value determined by valuers called by Mr Stone, which valuations were said to establish its value. It is thus necessary to consider these two different aspects, the first being the history of endeavours to sell the property, and the second being a consideration of the valuation evidence. 35   Bainton J held that the power of sale was exercised "in good faith". His Honour said:

"I am unable, on the material which I have recapitulated, to conclude that the power of sale was not exercised 'in good faith'. On the contrary, I am satisfied that it was."

The background to the mortgagee's sale

36   On 3 October 1988 Mr Stone, through Anchor Mortgage Consultants Pty Limited, sought a loan from Farrow of $550,000. The letter indicated that Mr Stone wished to subdivide the Duke Place property into two allotments. On one allotment (which became Lot 501), there was a house which it was intended to alter at an estimated cost of $10,000. There was an existing mortgage of $410,000. The loan of $550,000 sought was to pay out that existing mortgage, to fund the alterations to the house, to pay a Council fee of $9222, and to prepay six months interest. The application said that

"With the subdivision approved, local agents now value the main house and land at between $800,000 to $1m, and the new block of land at between $250,000 and $300,000 (see enclosures)."

37   The intention was to sell Lot 501 with the house on it within six months, the application stating that "Mr Stone …expects to realise$800,000 to $1m". With the surplus thus available after repayment of the loan, a house was to be built on the second allotment, which became Lot 502. In support of the application the brokers advised there had been "three valuations completed some months ago", and two opinions given by local real estate agents. The three valuations were said to be $620,000 in one instance and $600,00 in two. The two local real estate agents valued the totality of the Duke Place property at $600,000 and $620,000 respectively. The application stated that once subdivision had been obtained Lot 501 would have a value of $800,000 and the vacant lot $250,000 giving a total value of $1.05m. The loan application was successful and the funds were advanced. 38   In consequence a mortgage dated 21 December 1988 was executed securing the advance of $550,000. By that mortgage the interest was to be capitalised on each monthly payment date, with the principal sum and capitalised interest on it to be repaid on 20 June 1989. 39   Neither Lot 501 nor the property as a whole was sold by June 1989. Mr Stone's evidence was that he thought he had put the property up for auction prior to June 1989 and that "a number of agents were looking at the property during that period of time". 40   An extension of the loan was obtained for four months, that is until 20 October 1989. By then the loan amount was $592,405, the interest rate was 17.25 per cent and was to be capitalised. There was a substantial application fee. A second loan was also approved for the period ending 20 October 1989 in the sum of $63,400 with similarly capitalised interest. Thus Mr Stone, as at September 1989,had increased his debt mortgage obligations to $655,805 and had a significant accruing interest debt which was being capitalised. 41   It seems that on 29 September 1989 Mr Stone placed an advertisement in the Financial Review seeking either to sell the property, or find a joint venturer to repay the Farrow mortgage. Nothing eventuated. 42   Notwithstanding non-payment on 20 October 1989, Farrow took no action. A further approval for a new loan was given by Farrow. The loan by now was for a capital sum of $707,837.99, and the interest rate was 27.25 per cent reducible to 20.25 per cent on payment within seven days of the due date. The term was extended to 19 April 1990. Interest payments of $11,944.76 per month commencing 19 January 1990 were provided for. A special condition of the loan was

"the borrower to pay repayments from his own resources with foreclosure proceedings to be commenced immediately should the loan fall into arrears. The property is to be sold at auction on or before the first week of March 1990 with settlement from the sale to occur to clear our debt on or before 19 April 1990".

43   This loan was used to clear the prior loans and pay fees. Mr Stone said that between November 1989 and March 1990 he made "a couple of attempts" to put the property up for auction but could not remember details. He said: "I was seeing real estate agents constantly every week and I was looking for a joint venture. … I had so many meetings with agents and potential purchasers, I can't recall." Appeal Book Vol 4 p730 44   The property was not auctioned in March but went to auction on 27 April 1990. The property was placed in the hands of Richardson and Wrench in Balmain and Double Bay. Mr Stone spent $18,000 advertising that auction. The only evidence regarding that auction is a statement prepared by Mr Aussie Stone which stated: "There was no result attained from this auction in that there were no bids which reached the reserve price of $750,000 for the residence and $250,000 for the rear block of land.” 45   Subsequent to that unsuccessful auction the property remained with Richardson and Wrench. The property, it seems comprising Lots 501 and 502, was thereafter advertised at $890,000. It was not able to be sold at that price. It was subsequently reduced to $795,000 with further continuous advertising in the Sydney Morning Herald. The property was not able to be sold at that price. 46   On 5 July 1990, a press release was issued headed "Sydney's most exciting 'party house' to be sold as a result of real estate orgy". That press release stated that the owner was disenchanted with the usual real estate selling methods and predicted that as a result of the "unusual move of true multiple listing, a quick sale is expected, as the property has been reduced from $1.8m to $780,000". The release stated that "all media are invited to the open house champagne orgy, the house offers many picture taking opportunities, including secret rooms". 47   Mr Stone denied that he arranged that press release. It seems that his brother was, at this time, dealing with some aspects of the sale endeavours. 48   In August 1990 Mr Stone listed the property with four Balmain real estate agents being Kelly & Sons, Richardson & Wrench, Raine & Horne and Elders. The property was then being advertised for sale at $735,000. 49   Mr Stone's solicitors wrote to Farrow on 13 August 1990, placing before them "the particulars relating to the prior history of the sale of the property and its sale in the near future". Farrow were apparently threatening proceedings to take possession of the property. It was proposed that "George Stone continue his aggressive campaign to promote the sale of both properties in accordance with the property marketing report attached", and that Mr Stone submit a fortnightly report . He was to remain in possession caretaking the property, and if the proposals were accepted, would not oppose the order for possession. An attached document stated that the property was being advertised "every day of the week in the Sydney Morning Herald at $735,000", that the property had been open listed with the four Balmain agents mentioned, that a colour advertisement had been placed in the Elders All Agents magazine, that the property was advertised in Raine & Horne's Inter-Agency magazine and that a Mr Pond had organised publicity for the sale of the house (the "champagne orgy"). Further, a "property description guide" had been prepared by Mr Stone which was given to all persons inspecting the house, and the property was being advertised in the Wentworth Courier. 50   The property was not able to be sold during August or September 1990 at the reduced price of $735,000. 51   Asset Realty, with whom the property had apparently also been placed, wrote on 27 September 1990 "suggesting a number of ideas which … would make the house more desirable", namely improved access, the garden to be tended and the interior of the house "to be as clean and tidy as possible". They suggested an asking price below $700,000. Elders, on the same date, suggested repairs to the entry steps, tidying up the garden area, continued marketing of the property until the end of October but, if not sold, it be withdrawn from the market for two weeks so that the gardens and interior and exterior of the house could be "thoroughly overhauled" and the property listed for auction on 6 December. Richardson and Wrench advised that the price should be reduced to under $700,000 and the premises should be "cleaned up as much as possible and made light and airy". The place was said to be "too dark". The fourth agent, Kelly & Sons, suggested a "price reduction would increase the opportunity for a speedy sale", and also commented on the need for repairs to the entry, and the admission of more natural light. 52   The price was not reduced but on 5 October 1990 Mr Stone's solicitors advised Farrow that he would vacate the property on 24 October 1990, that the property would be cleaned inside and out and repairs carried out in preparation for an auction in December. 53   Farrow then sought a marketing proposal from Elders Balmain, one of the agents with whom Mr Stone had placed the property from at least August 1990. It also sought a valuation from Dyson Austen & Co Pty Limited. Mr Aussie Stone wrote to Farrow's solicitors on 24 October 1990. He had a caveat over the property to protect some interest. He advised that tenants had been removed from the property, furniture removed and repairs were being undertaken. He wrote: "George and myself are both interested in a proper sale being effected and recognise your fairness in all matters to date". He wanted nothing to happen "which would impede a proper sale being effected in the shortest possible time". Regarding the auction timing and the auctioneer, he wrote:

"If you keep an eye on the local prestigious Balmain market Elders are definitely the best bet. Their principal Peter Cassidey owns property in the area, has an excellent local reputation, has, notwithstanding poor Sydney wide sales of prestigious properties, just sold and settled two of the most valuable residences in the Balmain Leichhardt area. He also has current purchasers interested in the property as the result of the recent nationwide advertising. Because Elders see the value of this property they recently spent a thousand dollars of their own monies promoting its sale . They are the local professionals to sell this property, for the best price, and as quickly as possible. In support of my view of Elders as being the most suitable auctioneers I have invited them to make a direct submission to you which is attached as an annexure.

Auction Timing
Farrow's penalty interest rate is horrific which gives every reason for a sensible vendor carrying a large debt to want to sell quickly. But notwithstanding the urgency of attaining a fast sale the time is now right to go for an early December auction. Interest rates are falling and traditionally the market picks up pre-Xmas.
Who will organise the auction
George would like to sign immediately with Elders for the December 6 auction."

He concluded

"You can be sure of a totally vacated, cleaned, repaired property by Monday 5 November with keys in yours, agents and auctioneers hands and given your early approval for the December 6 auction advertising started as per schedule Saturday November 10". Appeal Book p1659

The annexed proposal from Elders contained an advertising schedule for advertising between 10 November 1990 and 1 December 1990.

54   In fact the auction occurred on 13 December 1990. The reason for the change of the auction date from 6 to 13 December is not clear. The correspondence suggests that there was no agreement regarding who should fund the auction costs, whether the auction should be in the name of the mortgagee or Mr Stone, or who would determine the reserve price. An agency agreement for the auction was not signed until 5 November 1990. There was discussion between the respective solicitors regarding whether the property should be sold as a whole or in two lots, it being the recommendation of Elders that the property be offered as a whole but if not sold then offered separately. Advertising commenced on 24 November, the property being advertised for three Saturdays rather than four as initially planned and for three Wednesdays as had been initially planned. All other aspects of the advertising programme remained unchanged. On 21 November Aussie Stone forwarded to the liquidator a withdrawal of caveat, noting that "the auction date is December13." 55   The agency agreement stated that in the opinion of Elders the current reasonable selling prices were $650,000 for the house property and $150,000 for the land being Lot 502. These figures are surprising in light of the inability to sell the totality for $735,000, and in light of the recommendation in late September that the price for the total property be reduced to below $700,000. 56   On 21 November 1990 the solicitors for the liquidator forwarded to Mr Cassidey at Elders Real State a letter forwarding contracts for the sale of the land. A "Water Board" problem was referred to in Special Condition 36 of the contracts. The letter stated:

"Please comply carefully with legal requirements for mortgagee sales and do not advertise the properties as such or suggest in any way that the properties will be sold for less than proper market value.
Our client will communicate reserve prices to you just before the auction."

57   Advertising and marketing of the property was undertaken by Elders. The principal of Elders supervising the marketing programme was Mr Peter Cassidey. A salesman prominent in marketing inspections was Mr Coleman. The trial judge found, correctly, that the auction was extensively advertised. It was advertised in the Sydney Morning Herald, the Weekend Australian, the Glebe and Western Weekly and the Wentworth Courier, in addition to there being a signboard and brochures printed. Advertisements appeared in at least one of the mentioned publications on 24th and 28th November, the 1st, 5th, 8th and 12th December. There were open inspections on the property on three Saturdays being November 24, December 1st and December 8th and three Wednesdays being November 28th, December 5th and December 12th. 58   On 6 December 1990 Mr Coleman wrote to the mortgagee summarising Elders efforts to that time. He advised that 48 groups had inspected the property

"an excellent response in the current market - and two copies of the contract for sale have now been issued to the respective purchasers.
The reaction of parties inspecting has been far from favourable, most indicating dismay or amusement at this 'relic of the sixties'.
The general consensus is that the 'improvements' erected are suitable only for demolition. With much regret I must advise that the selling price is indeed likely to represent land value only in this case. For your information the major objections made by prospective purchasers are as follows:-
1. The home is a series of small dark spaces, with no large rooms or visual space.
2. The home has been built largely from reclaimed and secondhand materials - inappropriate for the upper market here and is doubtfully waterproof, overly hot in summer and likely to be impossible to heat.
3. General lack of finish and facilities - there is one modest kitchen and two doubtful bathrooms, poorly finished and horrendously planned - women buyers are lost.
4. No garaging currently in place, lack of pool or additional facility of any kind.
To summarise - the property simply has no appeal to upper market owner-occupiers who view refurbishing such a building with much scepticism and we are once again back to land value.
It does not delight me to speak of a property in such a way, however I feel any aspiration towards a selling price in excess of $600,000 is wholly delusory and will simply result in a second failed auction on December 13th.
The large number of vacant lots currently being sold one street away enjoy superior views superior access and are selling slowly at values approximating $750 per square metre."

59   It is not surprising that Mr Stone, who had put much thought, effort and money into the building and its design, did not accept these criticisms of the building. However, he did accept in cross-examination that "there was a difficulty because the property had not been completed. The building work had not been completed." Further he said:

"Q. The premises lacked a modern well equipped kitchen?
A. The kitchen was a bit - it had a 2'4" stove, but it didn't have a modern sink and dishwasher, but that was all. It was in the approval the Council had given me, to fix that up. It wasn't a major deal.
Q. It had no garage or garages at all?
A. No.
Q. And another feature, common and popular in the area, was a swimming pool, which it didn't have either.
A. Because there was an existing sandstone wall and a huge
growth of bamboo, I just had to live with the bamboo and we just kept the cars in the street, but, to a new buyer, the lack of a garage or two garages might have been off-putting."

60   Many of the comments made by Mr Coleman, who was vigorously attacked in cross-examination, would appear consistent with the comments made in late September by other agents. 61   With a view to increasing the prospects of sale, Mr Coleman changed the nature of the advertisements in the final Saturday and Wednesday marketing. One advertisement was entitled "Developers/Dealers/Bargain Hunters and Thieves". Mr Stone took exception to this form of advertising. Two further contracts for sale were issued prior to the auction, making a total of four. 62   Notwithstanding the letter from Mr Coleman a reserve of $650,000 was` set for the auction. This was the figure included in a valuation by Dyson Austen dated 29 November 1990. 63   At a date which is not clear Dyson Austen and Co Pty limited, valuers, produced a valuation of the property as at 30 June 1989 of $850,000. That valuation was achieved by valuing the existing residence at $640,000, Lot 502 at $260,000, being a total of $900,000 less costs of approximately $50,000. 64   Dyson Austen were asked to provide a new valuation at 29 November 1990. The valuation report stated that "dual occupancy would not be a serious purchase consideration under current market conditions". It described the property stating:

"They present in an incomplete manner, which is understood to be part of the architectural style. Overall maintenance, in our opinion, has been lacking and outstanding repairs noted by us include:

Kitchen refurbishment becoming necessary;
Bathroom refurbishment becoming necessary (cracked handbasins and the like;
Guttering to be painted;
Replace rear door at ground level;
Tidy up flashing
We feel that the purchaser would additionally chase exposed electricals into brickwork;
Render exposed brickwork and generally brighten the premises up
At the current time it is our opinion that the premises do not present in an attractive manner.."

65   The valuation report indicated that the Sydney residential market had suffered a fall in the vicinity of 20 to 30 per cent with some examples of up to 40 per cent. It opined that Balmain had not been isolated from that trend. It stated:

"Directly comparable evidence to the subject to our research, is virtually non-existent with very few sales being recorded in the area over the past six months. Values appear to have slipped further in this six months period and sales prior to that time require adjustment for the downward market movement."

It then referred to such sales as might have a bearing on the valuation and traced the history of and gave a brief history of endeavours to sell the property. It noted that:

"The residence on Lot 501 is somewhat different from the usual Balmain East style and is expected to have very little appeal to the general market. The vacant site (Lot 502) would not appear to have a possibility of a water outlook but would provide a quieter rear parcel overlooking a small public reserve."

It valued the two lots together at $650,000, but gave an individual valuation for Lot 501 of $450,000 and Lot 502 of $220,000.

66   The auction took place on 13 December 1990. There were four bidders. The highest bid was $570,000 for the totality, it being the instruction of the mortgagee that the property be sold as a whole. The highest bid for $570,000 was from a Mr Cosco. That offer was not accepted although Mr Cosco signed a contract and left a deposit of $57,000. 67   On 14 December 1990 Elders referred the bid to the mortgagee. In so doing it stated that

"The price, $570,000 is an excellent one in the current market due to the steep competition the property has suffered.

As previously stated an exhaustive and expensive four week promotional campaign resulted in some 66 groups inspecting the property in total. This is an unusually high number in the present market. Of these parties four requested copies of contract and four were actually bidding. The summary is as follows:-
(i) All but two parties inspecting recommended demolition
(ii) All parties bidding intended to demolish and redevelop the site.
(iii) No party was interested in the property as a home.
(iv) Current record levels of stock are available on the Balmain peninsula with most vendors forced to meet the market at this point of time.

One street away, a new residential subdivision of a high calibre has set current market prices. These sites have superior views, superior access, no drainage or Water Board problems, no demolition costs and, located at 87 Darling Street, are selling at prices ranging upwards from $150,000 with an average of $750 per square metre being achieved.
We cannot express forcefully enough the rejection suffered by the improvements on the site at the hands of all half-million dollar range buyers.

Further we can now claim, without hesitation to have achieved maximum market exposure and thus we acknowledge today's price represents the maximum market price."

68   Mr Stone did not accept the bid of $570,000 as being the market value. He complained to the liquidators of the mortgagee by letter of 15 January 1991. He wrote:

"My specific interest in the 2 Duke Place property was not only as the MORTGAGORS, but also as the ARCHITECT/PLANNER who had spent SIXTEEN YEARS building this RESIDENTIAL STRUCTURE so that it could be utilised to play a vital and continuing role in the promotion of a network of community-and-ENVIRONMENTALLY-oriented-creative-leisure-centres around Australia.
No 2A Duke Place is not just a residence, in the normally-accepted sense. It is a unique "prototype" for a whole range of accommodation buildings to be built within an equally unique network of arts & crafts & rural-activity centres to be known as the Wildlife Lodges" Resort network."

69   He complained of the timing of the auction, apparently for the first time, asserted that approvals were in place to convert the residence into two separate strata titled townhouses. He asserted that "Less than one-half of my property could conceivably attract $550,000, if the dual-occupancy conversion was completed" and that the rear lot (which he wrongly described as Lot 501 as did Bainton J) "will assuredly attract between 200,000 and 300,000 dollars". 70   Apparently Mr Stone also asserted that there were purchasers available who wished to buy Lots 501 and 502 separately, and that, if sold separately more than $570,000 would be achieved. This resulted in the solicitors for the mortgagee writing to Mr Stone's solicitors offering him a "final opportunity to submit the names of any parties who are interest in buying the Lots separately and the prices they are prepared to pay and evidence that they are ready, willing and able to proceed immediately". No such purchasers were advanced. 71   On 21 January 1991 the under bidder at the auction, a Mr Anderson, offered $580,000. On 23 January 1991 Farrow instructed Elders "to endeavour to achieve a sale price of $600,000 without jeopardising the current offer". On 6 February 1991 Elders wrote to each of Mr Cosco and Mr Anderson, requesting that they put forward their best offer. On that day Mr Cosco increased his offer to $580,000. On 7 February Mr Anderson advised that his offer remained at $580,000 being "$380,000 for the house and $200,000 for the land". On 8 February 1991 the mortgage indicated that it proposed to accept Mr Cosco's offer but gave Mr Stone a further time to see if he could do anything further. No additional purchaser eventuated, although on 11 February 1991 Mr Stone wrote to the liquidator stating:

"Could I be given several weeks to find a joint venture partner who would at least match the highest bid of those bidding now, so that this building may serve its original and long standing function".

72   Contracts were exchanged with Mr Cosco for $580,000 on 18 February 1991 and the sale was completed on 9 April 1991. 73   To my mind, a mere reciting of the history of the endeavours to sell this unusual property, which endeavours commenced prior to June 1989, and culminated in a sale in February 1991, with the property being on the market with a multitude of agents, being auctioned twice, and being the subject of continuous endeavours to sell at ever decreasing prices, all of which, over a period of 18 months, were unsuccessful and which culminated in an auction widely advertised over a three week period, which attracted many inspections and produced four bidders, did result in the property being sold at its market value. On any view the property is an unusual one, as Mr Stone acknowledged, it being designed as a prototype of at least some aspects of Mr Stone's concept for a rural recreational development. The evidence makes it plain that the property was not attractive to purchasers. Mr Stone's emotional attachment to the site, to the buildings which he erected and modified, to the concept of it being of significant architectural value both in situ and as a model for different developments elsewhere, may be recognised. However, the true test of the value of a property is the price which a willing but not over-anxious purchaser will pay to achieve a purchase and which a willing but not over-anxious vendor will accept to achieve a sale. That price is best determined by the market after a proper advertising of the property. 74   Mr Stone's attachment to the property, the nature of which I have described, has led him to the belief, supported by some valuers whom he has engaged, that the property has a special value. It may well have a special value to him. Were the property to be resumed by a resuming authority, that authority would be obliged to recompense Mr Stone for any determined special value. Similarly, if a property has a special value to a purchaser, for instance adjacent proximity, that may induce a purchaser to pay more than others would. However, neither of these concepts have application to a mortgagee exercising a power of sale. The mortgagee is entitled to sell the property at market price provided there has been a proper advertising and marketing campaign prior to the sale. 75   It seems impossible, to my mind, to hold, on the evidence of continuous endeavours to sell the property over a period of 18 months, both by Mr Stone and the mortgagee, that other than the value of the property was achieved in the sale effected in February 1991 after the auction in December 1990. It follows that there was not a sale by the mortgagee at an undervalue.

Valuations

76   It follows from what I have said that I regard the valuation evidence as of little significance. Had the process of advertising, marketing and sale of the property been shown to be unsatisfactory or inadequate, a question might have arisen whether the price achieved by the process was other than the true market price or value of the property. In that circumstance valuation evidence might have been important to establish whether, in truth, the price realised was an undervalue, but that is not this case. 77   It is convenient to summarise the valuation material:

Valuations/Opinions

Pre October 1998 J Macarthur Realty $ 620,000
Pre October 1988 Lang Simmons & Boylen $ 600,000
Pre October 1988 R.V. Dimond Group $ 600,000
Pre October 1988 Balmain Real Estate $ 600,000

(Opinion)

Pre October 1988 (Montano Real Estate $ 620,000
(Opinion)

Local Valuers
( after subdivison )

Pre October 1989 Lot 501 $800,000
Lot 502 $250,000 $1,050,000


30 June 1989 Dyson Austen & Co $ 850,000

27 September 1990 Asset Realty Less than (Opinion) $ 700,000

27 September 1990 Richardson & Wrench Less than (Opinion) $ 700,000

29 November 1990 Dyson Austen & Co $ 650,000

6 December 1990 Elders (Not in excess of) (Opinion) $ 600,000

13 December 1990 Purchasers $ 570,000

6 February 1990 Purchasers $ 580,000

24 August 1994
(Valuation at 13/12/90) G.W. Heydon (John $ 580,000
Ledgerwood Real (As one Lot)
Estate Pty Ltd.
Lot 501 $ 405,000
Lot 502 $ 180,000

14 February 1995 Mr Phippen $1,065,000
(as at 31/12/90)

78   In addition Mr Stone called a Mr Garder, a valuer. His report was somewhat unusual, as Mr Garder accepted, as his report was prepared following an inspection on 16 June 1994, although he was asked to "investigate the circumstances of the sale in December 1990 and to give an opinion of value.” His report stated:

"In the case of the subject property I believe a reasonable reserve would have been:
Front Lot with house $600,000
Rear block with DA $275,000"

His report concluded:

"In conclusion it would not have been unrealistic, at a well attended auction, held at an appropriate time to expect to receive bids of:
Whole property $850,000

Front block with house $650,000
Rear block with DA $300,000"

He expressed the opinion that "the choice of 13 December for an auction date was not ideal as this is at the end of the real estate auctioning year and generally a very quiet period; a time for bargain hunters".

79   There is nothing in the evidence to suggest that Mr Garder was aware of the prior endeavours to sell the property pre-auction, of the extent of advertising or inspections, or of the fact that there were four bidders at the auction. He apparently was told that the price achieved was $580,000. It can be shortly put, correctly in my view, that his opinion simply does not accord with the reality of what people were prepared to bid. His general view was that the property would not be unattractive to purchasers, but, as the overwhelming body of evidence established, it was. 80   Mr Stone also called a Mr Hennessy, a real estate agent from L.J. Hooker. His evidence was that:

"In my opinion based on the marketing material that I have seen with the first advertisement appearing on 28 November 1990 and the auction being held on 13 December, that insufficient time was given to expect a full testing and awareness of the market".

Unsurprisingly, in my view, Mr Hennessey was not cross-examined. His evidence displays a complete ignorance of the factual circumstances relating to the sale of the property over the period in excess of a year pre-auction, and, further, the paragraph quoted is factually wrong as the first advertisement appeared on 24 November 1990 thus giving a three week three Saturday and Wednesday marketing campaign. Any person with knowledge of the endeavours to sell this property throughout 1990 could not sensibly state that there had not been a "full testing and awareness of the market".

81   All of the valuations, except that of Mr Phippen, were based upon an assessment by reference to comparable sales of what the property either as a whole or in two lots would bring. Mr Phippen's approach to valuation was quite different. It was based upon a "hypothetical analysis". It assumed that the existing building on Lot 501 would be extended and converted to dual occupancy with the two dwellings thus produced being sold for $750,000 and $650,000 respectively. It assumed that a dwelling would be erected on Lot 502 which would also have dual occupancy and that each of the dual occupancies on Lot 502 would be sold for $375,000. .This produced a gross realisation of $2,150,000. The costs of construction, interest, acquisition costs, sale costs and a profit and risk factor of 15 per cent were deducted leaving a balance of $1,065,000. 82   In addition, Mr Phippen also opined that, if Mr Stone had been given "the opportunity to complete the proposed approved development" he would have received a profit of $270,000. Had he completed the project he would have been able to use portion of it as a model to sell to prospective investors Mr Stone's proposed "resort network vision". That network was said to have "projected minimal annual profits in excess of $200,000". Mr Phippen added that $200,000 being one year's lost trading profit from the properties venture to the $270,000 development profit to opine that the property had a special value to Mr Stone of $470,000. 83   The evidence of Mr Phippen regarding special value was not admitted by Bainton J. However, Mr Stone pressed this Court with submissions that special value should be taken into account in determining whether the sale by the mortgagee was at an undervalue. It is not clear how Mr Phippen intended to use the "special value of $470,000". For reasons previously given, in my view any question of special value which the property may have had for Mr Stone is not material to that question as the sale was a sale by a mortgagee exercising a power of sale. 84   Mr Phippen's valuation was not accepted by Bainton J. In my view his approach is quite unrealistic. It may be a theoretically acceptable method of valuation. However, the reality was that Mr Stone was in no position to develop the property in the manner that Mr Phippen assumed. Further, the property had been on the market for a very long period indeed and had been widely advertised. No developer came forward to purchase the property to develop it in the manner which Mr Phippen assumed would be profitable. There was no evidence which supports any view that the dual occupancy on Lot 501 could be sold for $750,000 and $650,000 respectively. The totality of Lots 501 and 502 could not be sold for that price as the prior 12 month history demonstrated. There was no evidence to support the realisation on the dual occupancy on Lot 502, if such dual occupancy consent could have been obtained from the local Council. At the date of sale it had not been so obtained. Knowledge of the prior endeavours to sell the property, including to developers, result in Mr. Phippen's theoretical valuation being quite out of touch with the reality of the actual falling real estate market in December 1990.

Conclusions

85   I have taken the unusual step of addressing this matter at some length rather that simply concentrating on criticism of the trial judge's findings. This course has been adopted because of Mr Stone's obvious dissatisfaction with the trial proceedings, and his unwillingness to accept the reality which the evidence to my mind makes plain. I have little doubt that this is because of his close personal attachment to the property. Nonetheless, the evidence establishes overwhelmingly that neither he, nor the mortgagee, were able to obtain a price in excess of $580,000 for the Duke Place property notwithstanding a long and widely advertised endeavour. The inescapable conclusion is, in my view, that the price realised post auction of $580,000 was, at February 1991, the true market value of the property. I agree with Bainton J that there is no evidence at all to suggest that the mortgagee exercised its power of sale otherwise than in good faith. 86   It follows that the appeal must be dismissed with costs.

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