Agio Trustees Company Ltd v Harts Contributory Mortgages Nominee Company Limited HC Auckland CP404/381-Sdoo

[2001] NZHC 957

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP404/381-SDOO

BETWEEN AGIO TRUSTEES COMPANY LTD as trustee of the HERNE BAY TRUST
First Plaintiff

AND ETHNIK KRASNIQI
Second Plaintiff

AND HARTS CONTRIBUTORY MORTGAGES NOMINEE COMPANY LIMITED
First Defendant

AND BRYCE EARWAKER
Second Defendant

Date of Hearing: 11-15 June and 31 July - 3 August 2001

Date of Judgment: 11 October 2001

Counsel: S Grant and A Neems for plaintiffs
B Gustafson and R Paul for first defendant
B Hunt for second defendant

JUDGMENT OF O’REGAN J

Solicitors:
Ellis Gould, DX CP22003 Auckland for plaintiffs
KPMG Legal DX CP22001 Auckland for first defendant
Beca & Co, DX CP 24019, Auckland for second defendant
Counsel:
Sandra Grant, DX CX 10258, Auckland
Barbara Hunt, PO Box 4420, Auckland

INDEX

BACKGROUND
The claims and counterclaims
Section 103A
Good Faith
Counterclaim
The facts
Agio’s purchase
Harts’ mortgage
Attempts to sell
Agio defaults
The appointment of Ms Cameron
The unsuccessful auction
Post-auction marketing
The refinancing proposal
Harts’ decision on a mortgagee sale
The offer by Mr Earwaker
The Jolly Farmer offer
Steps to comply with the Real Estate Agents Act
The interim injunction proceedings
The Okinawa offer
The sale to Mr Earwaker
Was the marketing campaign adequate?
The value of the property
THE PLAINTIFFS’ CLAIMS:
The Law
Section 103A
Duty to act in good faith
The Claims: Overview
Sale to Mr Earwaker: Duty to act in good faith
Section 103A: (i) Failure to promote and market the property adequately
Section 103 A: (ii) Failure to accept Jolly Farmer offer
Section 103 A: (iii) Failure to pursue the Okinawa Trust offer
Section 103A: (iv) Failure to obtain the best price reasonably obtainable
Duty to act in good faith: Appointment of Ms Cameron
Conclusion
REMEDY
Setting aside the sale
Damages
COUNTERCLAIM BY HARTS
COSTS

BACKGROUND

[I] This case is about the mortgagee sale of a property at 7/79 Shelly Beach Road, St Mary’s Bay, Auckland (the property). The property was owned by the first plaintiff (Agio) as trustee of the Herne Bay Trust which had been established at the instigation of the second plaintiff (Mr Krasniqi). The first mortgagee of the property was the first defendant (Harts) which had advanced $1,675,000 to Agio. Mr Krasniqi was the covenantor under the mortgage.

[2] After Agio defaulted, it made efforts to sell the property, which failed. Harts then entered into possession, appointed the agency previously engaged by Agio, Realty Solutions Ltd, to sell the property, and, without further advertising or marketing, sold it to the second defendant, Mr Earwaker. He was the sales manager of Realty Solutions. The agent at Realty Solutions responsible for the property was Ms Cameron, the de facto wife of Mr Tallentire of Harts. He had recommended her to Agio. There was a significant shortfall for which Agio and Mr Krasniqi are liable.

The claims and counterclaim

Section 103A

[3] In their statement of claim the plaintiffs allege that Harts breached s 103A of the Property Law Act 1952 in that it failed to:

[a] Properly promote and market the property to obtain the best price reasonably obtainable at the time of sale on 4 August 2000 to Mr Earwaker;

[b] Accept an alternative unconditional offer which was $50,000 higher than the price accepted from Mr Earwaker;

[c] Pursue negotiations with an alternative potential purchaser, namely the Okinawa Trust;

[d] Obtain the best price reasonably obtainable at the time of sale.

Good faith

[4] The statement of claim also alleges that Harts owed the plaintiffs an obligation to act in good faith in disposing of the property and it breached that obligation because:

[a] It arranged for Realty Solutions to market and advertise the property when it was connected (by virtue of the Tallentire/Cameron relationship) with that agency, in circumstances where the agency was not appropriate, or alternatively not the best agency to appoint to sell the property in order to obtain the best price reasonably obtainable at the time of sale;

[b] It sold the property to Mr Earwaker who was a principal of Realty Solutions which constituted a breach of the prohibition against the sale by a mortgagee to an agent acting for the mortgagee on the sale.

[5] The plaintiffs seek an order that the sale to Mr Earwaker be set aside or an order that Harts pay to the plaintiffs damages, being the difference between the market value of the property and the purchase price paid by Mr Earwaker.

Counterclaim

[6] Harts counterclaims against both plaintiffs seeking the difference between the net proceeds from the realisation of the property and the amount now owing under the mortgage.

The facts

Agio’s purchase

[7] Agio, as trustee of the Herne Bay Trust, purchased the property in September 1998. The price specified in the contract was $2,300,000, but the transaction involved a property exchange under which the seller purchased other properties from interests associated with Mr Krasniqi, as well as paying $150,000 in cash to Agio. Agio borrowed $1,675,000 from Harts, secured by a first mortgage over the property, as well as a smaller advance from Force Holdings Limited, secured by a second mortgage. Agio’s liability under the mortgage was limited to the assets of the Herne Bay Trust. Because of the property exchange, the consideration of $2,300,000 specified in the contract for sale is not necessarily an indicator of the real value which passed between Agio and associated Krasniqi interests, and the seller of the property.

Harts’ mortgage

[8] The mortgage was a short term arrangement. The principal was to be paid in one lump sum on 14 February 1999. Subsequently the repayment date was extended, first to 1 June 1999 then to 1 September 1999 and finally to 1 March 2000.

[9] The loan offer from Reeves Moses Hudig Mortgage Brokers Ltd, a company associated with Harts, included a number of special conditions. (Harts was, at the material time, known as Reeves Moses Hudig Mortgage Nominee Company Ltd). One of these was that Reeves Moses (it is not clear from the context whether this is Harts or the associated company), would assume full control of the property for a number of purposes, giving it control over any sale. There was also a condition that the property would not be available for occupation by Mr Krasniqi.

[10] This special condition was not reproduced in the mortgage document itself, although the power of attorney clause gave Harts as mortgagee power to do many of the things referred to in the special condition, which indicated that the parties considered that the party referred to in the loan offer was Harts, not the associated company. The loan offer also required that Agio deposit with Harts the sum of $155,000 (from which interest would be paid) and an amount equal to the GST refund it received from the Inland Revenue. These requirements appeared in the mortgage document itself.

[11] The special condition has some practical significance because Harts did not take an active role in the marketing of the property before the mortgagee sale decision, and did none of the things referred to in the special condition. However, there was no plea on the plaintiffs’ behalf that this involved a breach of contract by Harts, so its significance relates only to the impact on the later marketing campaign and on Harts’ reliance on that campaign, after the mortgagee sale decision had been made.

Attempts to sell

[12] Agio tried to sell the property. Initially, Mr Krasniqi instructed Bayleys Real Estate Limited to market the property. A listing agreement for three months was signed but Bayleys marketed the property for only about four weeks. The listing agreement refers to an asking price of $2,600,000. No offers resulted. Agio subsequently entered into an unconditional contract with a Mr Bartells, but this failed to settle, as did a subsequent agreement with Mr Bartells (Mr Bartells subsequently went bankrupt). Another transaction involving Palm Beach Developments also failed to settle. These proposed transactions involved exchanges of property. Mr Krasniqi gave evidence of other proposals to sell which did not come to fruition.

Agio defaults

[13] Harts did not agree to extend the mortgage beyond 1 March 2000 and, on 10 March 2000 it served notices under s 92 of the Property Law Act 1952 on both Agio and Mr Krasniqi.

The appointment of Ms Cameron

[14] On 16 April 2000 Mr Krasniqi appointed Ms Donna Cameron of Realty Solutions to manage the sale of the property, including making arrangements for an auction on 25 May 2000 and marketing the property up to that time. Realty Solutions is the Ponsonby franchisee of the Ray White brand, and trades under the name Ray White Ponsonby.

[15] The circumstances of this appointment are a matter of dispute. Mr Krasniqi said he met with Mr Tallentire of Harts in April 2000 and was told that the pressure was on to sell the property and that, since Bayleys had already attempted a sale, Mr Krasniqi was to use Ms Cameron as the selling agent. Mr Krasniqi said he believed he had no real alternative but to agree. He said neither Mr Tallentire nor anyone else disclosed to him, prior to his giving the listing to Realty Solutions, that Ms Cameron was Mr Tallentire’s de facto wife, and that Mr Tallentire did not tell him this until two weeks after the listing agreement had been signed.

[16] On the other hand Mr Tallentire’s evidence was that he told Mr Krasniqi his de facto partner Ms Cameron was a real estate agent with Realty Solutions and Mr Krasniqi could give her a call if he wished. The decision to list the property with Realty Solutions was entirely up to Mr Krasniqi.

[17] There was a great deal of conflicting evidence as to whether Ms Cameron and Realty Solutions were appropriate agents to market the property, given its unique nature and very high value, and about the adequacy of the marketing campaign which they undertook. I will deal with that later.

[18] I accept the evidence of Mr Krasniqi that he felt a degree of coercion in appointing Ms Cameron, following her recommendation by Mr Tallentire. At the time the recommendation was made, interests associated with Mr Krasniqi were in default to Harts, in respect not only of the mortgage of the property, but also of two other mortgages. I accept he felt under some pressure not to offend Mr Tallentire.

[19] While Mr Krasniqi was clearly an experienced property trader he said he had not heard of Ms Cameron prior to the recommendation, and the evidence from two other real estate agents who gave evidence for the plaintiffs, Mr Meo and Mr McRae, was that Ms Cameron was not known for selling high value properties in the St Marys Bay/Herne Bay area. Her own evidence was that she had never sold a property having a value greater than $1,000,000 and it appeared Realty Solutions was not known in the higher value property market either. She has recently won an award for real estate advertising.

[20] It was inappropriate for Mr Tallentire to make the recommendation of his de facto wife, given that any commission she earned on the sale would accrue to their collective household and that his position as an officer of the mortgagee to which Agio and Mr Krasniqi were in default placed him in a position of real influence. This was heightened by the fact that the special conditions of the loan appeared to give Harts a contractual right to control the sale process. I accept Mr Tallentire’s evidence that he told Mr Krasniqi that Ms Cameron was his de facto partner before the listing agreement was signed, but this does not alter the fact that, in the circumstances where Mr Tallentire was in a position of influence over Mr Krasniqi, the recommendation was inappropriate.

[21] A budget of $4,424 was set for the Realty Solutions’ marketing campaign. While Harts apparently paid for the earlier Bayley’s campaign (which was consistent with the special terms in the loan offer), Ms Cameron’s evidence was that Mr Krasniqi set the budget and met the cost in relation to the Realty Solutions’ campaign.

The unsuccessful auction

[22] The auction was held on 25 May 2000 in a church hall in Ponsonby. The evidence of Ms Cameron and her colleague Mr Damerell was that Mr Krasniqi instructed them to start the bidding at $1,700,000, notwithstanding their strong advice to the contrary, and that he set the reserve at $1,900,000. The auctioneer opened the bidding at $1,700,000 and there were no bids. Mr Krasniqi said he set the reserve at $1,900,000 because he was not authorised by Harts to accept any less than the amount owing. He denied that he set the opening bid. I accept the evidence of Ms Cameron and Mr Damerell that Mr Krasniqi set the vendor bid at $1,700,000. There is no reason to believe that any other party would have done so.

[23] Under the terms of the special condition in the loan offer, Harts had the right to set the reserve price, but although Mr Tallentire was present at the auction he did not do so, and so the reserve was set by Mr Krasniqi. However, this had no impact on the outcome because there were no bids. Mr Krasniqi criticised the venue of the auction and the fact it was not undertaken with other properties of the same kind. However, it is clear the critical element in the failure of the auction was the vendor bid being set at a higher figure, for which I find Mr Krasniqi must take responsibility.

Post-auction marketing

[24] After the auction, Realty Solutions kept marketing the property and the agency was extended for a period - again Mr Krasniqi attributed this to pressure from Mr Tallentire, who denied this.

[25] After the auction some offers were made for the property. Two were for $1,000,000 and one for $1,350,000. Two of these involved property exchanges. All were countersigned by Mr Krasniqi at $1,800,000 and no counter offers were received. Around this time Mr Earwaker made an offer through his family trust for the property at a price of $1,100,000, which was also countersigned by Mr Krasniqi at $1,800,000. Subsequently Mr Earwaker made a further offer of $1,200,000 which Mr Krasniqi countersigned at $1,500,000. Mr Krasniqi said he did this on the recommendation of Harts to sign at a lower figure than the debt owed. He said he had not done this before because he had no authority to sell at a figure below $1,800,000.

[26] However, Ms Cameron’s evidence was that Mr Krasniqi told her he would not sign at below $1,800,000 because he was under no pressure from Harts to sell. Mr Krasniqi would not have been able to effect a sale at a price lower than the amount needed to discharge the mortgage without the prior consent of Harts, because the s 92 notice had expired by this time and neither he nor Agio were in a position to pay any amount remaining outstanding on the mortgage in excess of the purchase price. However, I was not convinced that Harts was involved in the decision by Mr Krasniqi to countersign these offers at $1,800,000 and I do not accept his evidence that he was under any form of instruction from Harts to do so.

[27] Mr Krasniqi says he asked Harts for its agreement to the appointment of Bayleys to market the property, at least on a shared basis. Mr Tallentire said he saw this as a delaying tactic, and did not agree to the proposal.

The refinancing proposal

[28] In late July 2000 Mr Krasniqi wrote to Harts proposing a refinancing arrangement under which AMP would advance $1,300,000 on first mortgage which would be used partially to repay Harts. Harts did not agree to the proposal. The plaintiffs do not allege any breach of duty on Harts’ part in withholding its agreement to the proposal, so nothing more needs to be said about it. In his letter relating to the AMP proposal, Mr Krasniqi said that all possibilities for marketing the property had been “exhausted”.

Harts decides on a mortgagee sale

[29] At the end of July 2000, Harts decided to sell the property itself and entered into possession of the property. It had recently received an updated valuation from Hardie Shalders Restall of $2,200,000 which was considerably lower than its previous valuations. Hardie Shalders said the forced sale value was $1,300,000. Harts’ solicitors wrote to Ms Cameron that it wanted to appoint her as its agent to sell the property. The listing agreement between Harts and Realty Solutions was signed on 31 July 2000.

The offer by Mr Earwaker

[30] Realty Solutions then approached Mr Earwaker and other previous offerors with a view to persuading them to make increased offers to Harts. Ms Cameron’s evidence was that, at Mr Earwaker’s request, she arranged for a meeting on 1 August 2000 between Mr Earwaker, Ms McDonald (another agent at Realty Solutions who had been dealing with Mr Earwaker), Ms Cameron, Mr Tallentire and the solicitor for Harts. Mr Earwaker sought assurance that Harts was operating correctly as mortgagee and that, if he made an offer, it would be done correctly in terms of his involvement with Realty Solutions.

[31] The precise nature of Mr Earwaker’s involvement with Realty Solutions was somewhat clouded. He said he was neither a director nor shareholder of Realty Solutions. His evidence was that he was a consultant to his own company, Earwaker Investments Limited, which was employed by Realty Solutions to provide sales and marketing services. However, he also described himself as the sales and marketing manager for Realty Solutions, and outlined his responsibilities, which indicated he was in a position of considerable influence and had a supervisory role over marketing activities including those instigated by Ms Cameron.

[32] At the meeting on 1 August 2000, Mr Earwaker said he would prefer the property to be auctioned, and acknowledged in his evidence that he said this because he thought it would be better for him, not because he thought it would be better for the client of Realty Solutions, Harts. This was an illustration of the conflicting position he was in. Harts said it did not want to go to an auction and encouraged him to present an offer which he did. The offer was for $1,200,000. Later, Mr Earwaker advised that his offer would be open only until 5 pm on Friday 4 August 2000. There was also another offer but it was significantly lower.

[33] Mr Earwaker said he was uncomfortable about buying a property listed with his own agency under mortgagee sale conditions. He said he imposed the deadline of 5 pm on Friday 4 August 2000 because he had the settlement of the sale of his own property coming up on 25 August 2000 and needed certainty. It can equally be seen as a tactic to put pressure on Harts to sell - which, in fact, it did. Indeed, Mr Earwaker acknowledged his concern that his offer could be used as a lever by Harts to push the offers of other buyers, or potential buyers, higher. It is notable that Mr Meo said he thought a sale by a mortgagee to an associate of the agency engaged by the mortgagee was unprecedented, and Mr McRae said his firm, Bayleys, expressly forbade its agents from doing so. In that respect, Mr Earwaker’s initial instinct seemed to reflect industry practice and ethics more accurately than his later actions.

[34] Mr Tallentire advised Mr Krasniqi on 2 August 2000 that Harts was expecting an offer of $1,200,000. On 4 August, Mr Krasniqi was told that the offer of $1,200,000 had been made by interests associated with Mr Earwaker. Another, lower offer was also made but rejected as being too low. Mr Tallentire said that the owner of the house next door to the property, Mr Matthew Ridge, was present at Mr Krasniqi’s home when Mr Tallentire told Mr Krasniqi about Mr Earwaker’s offer. Mr Krasniqi previously had indicated that Mr Ridge might be interested in purchasing the property, but Mr Tallentire said Mr Krasniqi told him that Mr Ridge was no longer interested. However, Mr Krasniqi’s evidence is that he advised Mr Tallentire that Mr Ridge was interested in buying the property.

The Jolly Farmer offer

[35] Around 4 pm on 4 August 2000, Mr Krasniqi faxed to Realty Solutions an alternative offer of $1,250,000 for the property from the Jolly Farmer Trustees Co Ltd on behalf of a trust to be formed. Mr Krasniqi said in evidence that Matthew Ridge would be a beneficiary under this trust but that is not apparent from the offer document itself. The offer was signed “Sara” which was the Christian name of Mr Krasniqi’s secretary. Mr Krasniqi’s said the offer was made on behalf of Mr Ridge which Mr Ridge confirmed in his evidence, albeit with some considerable uncertainty as to the details. However, neither Ms Cameron nor Mr Tallentire were informed at the time that Mr Ridge was the person behind the Jolly Farmer, and it was clearly not apparent on the face of the document. I do not accept Mr Krasniqi’s evidence that he told Mr Tallentire that Mr Ridge was going to make an offer.

[36] Mr Tallentire said his scepticism about the Jolly Farmer offer was also influenced by another incident in which he said Mr Krasniqi had claimed that another property owned by interests associated with Mr Krasniqi and mortgaged to Harts, was the subject of a contract with a Mr C Reynolds. Mr Krasniqi had led Mr Tallentire to believe this was a Mr Colin Reynolds of Symphony Group Ltd, when in fact that Mr Reynolds had absolutely no involvement with the transaction. Mr Krasniqi denied misleading Mr Tallentire in this way and his counsel said Mr Tallentire’s concerns about the proposed Reynolds transaction arose after these events. I accept that is so, and that this incident would not have affected Mr Tallentire’s view of Mr Krasniqi at the relevant time.

[37] Mr Tallentire was under some pressure, because the deadline for the lapse of Mr Earwaker’s offer was fast approaching. Eventually that offer was accepted.

Steps to comply with the Real Estate Agents Act

[38] Because Mr Earwaker was involved with Realty Solutions, it was necessary for steps to be taken to comply with the requirements of ss 63 and 64 of the Real Estate Agents Act 1976. Harts executed a consent to Mr Earwaker purchasing the property, as required by s 63(2) of that Act, and Mr Earwaker obtained a valuation prepared by a registered valuer, Mr J G Edwards of Edwards Associates (2000) Ltd to comply with s 64. The valuation indicated on a normal willing buyer/willing seller basis the value of the property was at, or close to, a level of $1,500,000 and that, under a forced seller situation, given the higher price range, a 20% discount off the fair market value assessment reflected a sale price of $1,200,000.

[39] The assessment included an allowance for chattels such as floor coverings, drapes and light fittings contained within the dwelling but, significantly, did not include chattels comprised in the sale to Mr Earwaker.

[40] Under s 64(4), Halts was entitled to void the contract with Mr Earwaker if the valuation when supplied was greater than the valuation specified in the consent form signed pursuant to s 63, which for the property (including chattels) was $1,200,000. That entitlement appeared to apply in this case, for reasons which I will set out later.

[41] The valuation was provided to Harts as seller, but Mr Earwaker instructed his solicitor not to disclose it to Agio or Mr Krasniqi. Mr Earwaker said he did this on advice from his solicitor that he had no obligation to disclose those documents to Mr Krasniqi. It is hard to see why such advice was given, and if it was, why Mr Earwaker nevertheless refused to provide copies of these documents to Agio or Mr Krasniqi, given that they had specifically requested them. As mortgagor and guarantor, they had an obvious interest in the sale of the property. Even if Mr Earwaker had no legal obligation to disclose them, his actions were hardly consistent with a party with nothing to hide who was concerned to see an open and above board sales process.

[42] Mr Earwaker moved into the property as soon as he paid the deposit, which was an unusual feature of his contract with Harts. He insisted on this, he said, because of his concern that the mortgagor (presumably Mr Krasniqi) might strip the property. There was no evidence that this was a real concern. The rent of $200 per week which he paid seemed extremely low for a property with a value of over $1,000,000.

The interim injunction proceedings

[43] On 15 August 2000, Agio and Mr Krasniqi sought an ex parte injunction restraining the sale, which was granted by Tompkins J. The granting of that injunction was significant because clause 15 of the contract between Harts and Mr Earwaker provided that Harts could cancel the contract if any injunction or Court order restraining the sale was granted or made.

[44] The ex parte injunction continued until a full hearing of the injunction application could be held. This occurred on 6 September 2000 before Chambers J. He did not find it necessary to analyse whether there was a serious question to be tried, but assumed that in the plaintiffs’ favour. The matter was therefore decided on the balance of convenience. He found that was in favour of Harts, and therefore discharged the original injunction.

[45] Chambers J recorded in his judgment that Harts’ counsel had advised him Harts would almost certainly void or discharge its agreement with Mr Earwaker and recontract either with him or somebody else at a higher price. This was said to be so likely that the injunction was unnecessary. Counsel informed the Judge that the right to cancel arose because the original injunction had been granted which triggered clause 15 (despite the later discharge of the injunction), and because of the right Harts had to avoid the contract under s 64 of the Real Estate Agents Act. Whatever the outcome, Chambers J found damages would be an adequate remedy and the balance of convenience therefore favoured the defendants.

The Okinawa offer

[46] On 10 August 2000, Shelley Beach Corporate Trustees Ltd (SBC), as trustee of the Okinawa House Trust (Okinawa) (the property was sometimes referred to as Okinawa House) made an offer to Agio to purchase the property for $1,300,000. Okinawa was established on behalf of Mr Ridge. Of course Agio was not in a position to sell at that time, but on 25 August 2000, Harts was informed that Okinawa would make an offer in the same terms and for the same price to Harts.

[47] On 28 August 2000, Mr Earwaker’s solicitors wrote to Harts’ solicitors threatening legal action if Harts were to give notice of intention to cancel the agreement between Harts and Mr Earwaker. Subsequently, Mr Earwaker caveated the title to the property to prevent registration of a transfer to any other party.

[48] The Okinawa offer was buttressed by an undertaking by the solicitors for Okinawa, Fortune Manning, to settle the purchase of the property within three working days of receipt of the signed agreement for sale and purchase to Okinawa by Harts. The undertaking confirmed that Fortune Manning held in its trust account the necessary funds to settle the transaction. In addition, Mr Ridge gave an undertaking to Harts that he personally guaranteed performance of the contract by Okinawa and that he would not withdraw that personal guarantee until seven days after a mortgagee auction had been held, so long as the auction was held within 60 days after the date of the undertaking. A similar undertaking was given by Mr Robertson on behalf of Okinawa.

The sale to Mr Earwaker

[49] Faced with potential proceedings from Mr Earwaker if it terminated its contract with him, Harts decided to try to persuade him to increase his offer to overcome the difficulty that his offer included chattels, while the valuation he obtained under s 64 of the Real Estate Agents Act did not. As the contract had a contingency sum of $150,000 relating to chattels, Harts’ solicitors asked Mr Earwaker to increase his offer by that amount. He declined to do so and eventually Harts and Mr Earwaker came to an agreement that the purchase price would be increased by $35,000 to $1,235,000.

[50] At no stage did Harts follow up matters with Mr Ridge or Okinawa. Okinawa’s offer was increased to $1,350,000 late on 15 September 2000, but that was after Harts had settled with Mr Earwaker. There was evidence that the increased offer was made by Mr Robertson, the director of SBC (as well as of Agio), without reference to Mr Ridge. In those circumstances there is reason for scepticism about the genuineness of this increased offer.

[51] Mr Tallentire’s evidence was that the reason for settling with Mr Earwaker was because litigation with him would delay settlement and penalty interest would keep accruing, pending the hearing of any case. Mr Ridge’s evidence was he was prepared to increase the Okinawa offer and that he would have done so if approached, but no discussions were ever initiated by Harts with him and he was therefore not given the opportunity to do so.

[52] In his affidavit of 5 September 2000, Mr Ridge also confirmed that Okinawa was willing to bid for the property if it was put up for auction, starting at $1,300,000. In other words, he was effectively providing an opportunity for an auction of the property with the $1,300,000 price underwritten.

Was the marketing campaign adequate?

[53] I heard much conflicting evidence as to the adequacy or otherwise of the marketing campaign undertaken by Ms Cameron and Realty Solutions in the period leading up to the auction on 25 May 2000, and following that auction up to the time that Harts decided to sell the property by way of mortgagee sale at the end of July 2000.

[54] Mr Colin Meo, a principal of Meo First National Real Estate Limited, gave evidence that:

• He was surprised at Ms Cameron’s appointment because she was not very experienced in selling properties in the area, neither she nor Realty Solutions was known for selling high value property, and such experience was very important;

• He thought the photographs of the property shown in the newspaper advertising were very poor because they did not emphasise the view (he suggested a balloon photograph);

• He believed that an extensive marketing campaign leading up to an auction was required and that the campaign in this case was not sufficiently high powered - the advertisements were small and “run on”, which he said did not attract buyers in this bracket.

[55] In cross-examination he denied that he had an axe to grind with Mr Earwaker, relating to a previous dispute between them when Mr Earwaker worked in Mr Meo’s firm. He acknowledged he had seen only some of the advertisements, and that his comments were based on those advertisements which he had seen.

[56] I also heard on behalf of the plaintiffs from Mr Geoffrey McRae, a real estate agent for Bayleys, with considerable experience in selling high value properties in the Herne Bay area, and a number of real estate industry awards. He had been the Bayleys’ agent responsible for marketing the property in late 1998 on instructions from Agio, when a price in the region of $2,200,000 was being sought, which did not attract any buyers. He also had a number of similar criticisms of the Realty Solutions marketing campaign. In addition, he said:

• He would have run an extensive marketing campaign with a budget of $10,000-$12,000 if he had been responsible for marketing the property;

• He thought internet advertising should have been undertaken. (Ms Cameron did contact overseas offices of Ray White but did not actually advertise the property on the internet);

• He thought the advertising should have referred to “$1,000,000 plus buyers” to make it clear that the $2,000,000 plus price level previously sought was not now the target.

[57] Mr McRae also acknowledged he had not seen all the advertisements and that some of the advertisements placed by Realty Solutions had a picture of the view, but a review of the advertising material shows that prior to the auction these were comparatively rare and the picture of the view was comparatively small in the context of the whole of advertisement.

[58] I also heard criticisms from Mr Krasniqi who said he expressed concerns about the marketing to Ms Cameron, particularly that she did not include photographs of the view in the advertisements prior to the auction. For this reason he said she included photographs of the view in subsequent advertising, but these were either obscure or very small.

[59] Ms Cameron’s evidence was that Mr Krasniqi did not complain to her and she had no reason to believe he had any concerns about the marketing. Correspondence from the time does not indicate any concerns on his part, and I accept Ms Cameron’s evidence that he did not express concern during the marketing period. She said the budget for the marketing of the property was set by Mr Krasniqi and the marketing effort was tailored to meet the limited budget. She also said the failure of the auction was caused by Mr Krasniqi setting the vendor bid too high and the interest from offerors after the auction was deterred by him countersigning offers at $1,800,000.

[60] Ms Cameron pointed out there was not only newspaper advertising. A banner, clearly visible from the motorway, was hung from the balcony of the house, a large sign was placed at the Shelly Beach Rd entrance to the property, there were a number of open homes and a full colour advertisement in the Property Extra publication. She said that the sign and banner were removed at one stage and she suspected this was done by Mr Krasniqi. On the evidence available to me I am not able to make a finding that that occurred, but I accept Ms Cameron’s evidence that Mr Krasniqi was a difficult client to deal with and he was not as co-operative and accessible as a determined seller ought to have been. His action in countersigning offers at $1,800,000 was, at the very least, unhelpful. Although he said this was effectively at Harts’ direction, there was no evidence of that. There was certainly nothing to indicate that Mr Krasniqi tried to contact Harts to modify the stance he said it was taking at that time.

[61] Mr Gary Denley, a very experienced real estate agent and national counsellor of the Real Estate Institute of New Zealand, gave expert evidence on behalf of Harts. He concluded that the marketing campaign undertaken by Realty Solutions and the conduct of the auction was satisfactory “in terms of the budget authorised”. In particular he said:

• Realty Solutions is a high profile real estate firm in Ponsonby/Herne Bay, specialising in residential real estate in that area;

• The fact that 140 people passed through the property and four offers were put to the vendors, is a satisfactory result of the marketing. (Mr Meo and Mr McRae also accepted that this number of people going through the property was a good result, but both qualified this by saying the real issue was the quality of the people (ie their likelihood of buying) rather than the numbers);

• While Ms Cameron may not be experienced in high value properties, sales of properties over $1,000,000 are rare, and high value properties would usually be those $500,000 and above;

• The advertising was acceptable in the light of the budget that Mr Krasniqi authorised Ms Cameron to spend, and the banner was an excellent marketing technique;

• The property did not suffer from being auctioned in isolation. He also commented that Mr Meo’s and Mr McRae’s evidence about needing to have a photograph showing the house and the view would have emphasised the negative feature of the proximity of the property to the motorway.

[62] I conclude that the marketing campaign was, to use Mr Denley’s words, “satisfactory in terms of the budget authorised”. Mr McRae’s criticism was largely focused on the need for a much higher profile, high powered campaign which would have cost considerably more. While that may be correct, I do not believe it would be fair to criticise Ms Cameron for conducting the campaign in a more limited way because of the more limited budget. She could not spend more than authorised by Agio under the listing agreement.

[63] In short the campaign would have been better if more money had been spent on it. Optimally, more money should have been spent. However, the decision not to spend more money is not something which can be laid at Harts’ door, because at this stage the sale of the property was under the control of Agio and Mr Krasniqi.

[64] While the special terms of the loan offer may have given Harts or its associate company control over the marketing process, this control was never exercised and no breach of this contractual provision is pleaded. In the context of this case therefore, it cannot be said that Harts’ failure to contribute a greater budget or take greater control over the advertising and marketing of the property during the period prior to the mortgagee sale decision being made at the end of July, amounts to a breach of Harts’s duties under the Property Law Act or at equity.

[65] However, the limited nature of the marketing campaign has an impact on the reasonableness or otherwise of Harts’ decision to rely on that campaign and not engage in any further marketing after the mortgagee sale decision was made. I will revert to this later.

[66] There was considerable evidence of the property not being presented at its best during the marketing period, because of a number of items of deferred maintenance and because it was not furnished. Again, there were allegations that this should have been laid at Harts’ door because of the special terms of the mortgage offer, which indicated they would take responsibility for this. I accept those failings were not something which show any actionable breach by Harts and in any event, I find that their impact on the sale process was not significant in the context of the pleaded breaches of duty in this case.

The value of the property

[67] I heard evidence as to the value of the property from a number of registered valuers. For the plaintiffs, evidence was given by Mr A R Gardner of Mahoney Gardner Churton Ltd, Mr R J Pheasant of Hardie Shalders Restall Ltd and Mr L P Lyons of Lyons & Co, all of whom had valued the property before the mortgagee sale occurred. For Harts, evidence was given by Mr I R Colcord of Seagar & Partners (Auckland) Ltd, Mr M B Gamby of TelferYoung (Auckland) Ltd and Mr J G Edwards of Edwards Associates 2000 Ltd.

[68] During the course of the evidence from the valuers, reference was made to a large number of valuations which revealed an astonishingly large range - from a low of $1,200,000 (that was a “forced sale” valuation), to a high of $2,750,000. Mr Pheasant and Mr Lyons had valued the property at $2,750,000 or $2,650,000 for various parties in 1999 and 2000. Mr Colcord’s valuations in 1997-98 were between $1,750,000 and $2,000,000. The market value valuations around the time of the sale were between $1,500,000 and $2,200,000 and the forced sale valuations between $1,200,000 and $1,350,000.

THE PLAINTIFFS’ CLAIMS

The Law

[69] The plaintiffs allege that Harts breached s 103A of the Property Law Act and its duty to act in good faith - see paragraphs 3 and 4 above. Before considering those claims in detail, I will summarise the principles that apply.

Section 103A

[70] Section 103A was considered recently by the Court of Appeal in Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586 [ The decision of John Hansen J in the High Court in Apple Fields is also referred to in this judgment. References to Apple Fields in this judgment are to the Court of Appeal decision unless stated otherwise]. Giving the judgment of the Court in that case, McGrath J traced the case law leading up to the enactment of s 103A. There is no need for me to do the same in this case. The principles which can be derived from the Court of Appeal’s judgment in the Apple Fields case can be summarised as follows:

[a] Section 103A is a legislative affirmation of the scope of the duty of care in negligence owed by a mortgagee who has decided to sell, as recognised in earlier New Zealand case law;

[b] That duty of care co-exists with the equitable duty of good faith but, in most cases, the duty of care will be the more onerous obligation;

[c] The duty is owed to the mortgagor and the subsequent mortgagee but the extent to which it is owed to a guarantor was not considered in Apple Fields;

[d] The duty of care is concerned with obtaining the best price reasonably obtainable as at the time of the sale. Accordingly it does not qualify the mortgagee’s right to decide in its own interest if and when to sell;

[e] Once a mortgagor decides to sell it becomes subject to the duty. There is no general rule that a mortgagee who has decided to sell and is minded to sell to a party in which it has an interest, must invariably take advice and thereafter market the property over a period of time, but in some cases a decision to proceed immediately to a sale in those circumstances will be indicative of a breach of the duty of care;

[f] Where a mortgagee decides to sell the mortgaged property to a party in which it has an interest, it carries the burden of proof that it had taken all reasonable steps to obtain the best price reasonably obtainable. The standard of proof is the civil standard;

[g] If the mortgagee fails to persuade the Court such reasonable precautions have been taken and that the interested party bought at the best price reasonably obtainable, the remedy for the breach as a general rule will be to set aside the sale and restore to the borrower the equity of redemption, but if such a remedy is inequitable, the Court’s remedy will be confined to damages;

[h] The determination of the “best price” in the context of the Apple Fields case was to be assessed having regard to the purpose of s 103A, which is to protect the vulnerability of those to whom the duty is owed, arising from the absence of any incentive for a mortgagee to obtain the full value of the property over and above the sum needed to clear the mortgage debt. In this case, where the proceeds of sale were significantly less than the mortgage debt, the issue is different, but the essential purpose is the same - to protect the mortgagor and the subsequent mortgagee from a sale at too low a price, leaving a heavy reliance on the personal covenant of the mortgagor for the remainder of the mortgage debt, which adversely affects not only the mortgagor but also the subsequent mortgagee (which will have a competing personal claim).

[71] It is clear that, in assessing compliance with the duty under s 103A, a Judge must look at the matter broadly and in a realistic way: Schollum v Graham (CA 30/97, 5 May 1998) at p 5. A similar statement appears in Alexandre v New Zealand Breweries Ltd [1974] 1 NZLR 497 at 501. While those cases predate s 103A, I believe the approach to the duty imposed by the section is the same.

[72] While it was reasonably clear before the enactment of s 103A that the mortgagee’s duty of care applied to guarantors of the mortgagor (Clark v UDC Finance Ltd [1985] 2 NZLR 636 and Downsview Nominees Ltd v First City Corporation Ltd [1990] 3 NZLR 265 (CA)), s 103A does not appear to include guarantors. The duty applies to a “mortgagor” which is defined as including any person entitled to redeem a mortgage according to his estate, interest or right in the mortgaged property. The Court of Appeal in the Apple Fields case found this included a subsequent mortgagee. However, those words do not appear to be capable of being interpreted to include a guarantor who may have some rights of subrogation but no estate, interest or right in the mortgaged property as such.

[73] This shortcoming in s 103A appears to have been recognised in the Law Commission’s report, A New Property Law Act (NZLC report 29), which proposes that the section dealing with this topic (clause 146 of the Law Commission’s draft bill) would apply to “the current mortgagor, any former mortgagor, any covenantor, any mortgagee under a subsequent mortgage and any holder of any subsequent encumbrance”. “Covenantor” is defined to include a guarantor.

[74] I conclude that in this case the duty under s 103A applies to Agio as mortgagor, but not to Mr Krasniqi as guarantor. That seems to me to be an illogical outcome and one which provides a good reason to recommend the prompt enactment of the Law Commission’s draft Property Law Bill - there are many other good reasons.

[75] Counsel for the plaintiffs suggested that the “best price reasonably obtainable” equates with the “true market value”. She referred to the fact that the Court of Appeal in Apple Fields referred to the use of that term in the decision of the Court of Appeal in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, and made no suggestion that the test had been altered by the enactment of s 103A. I do not think that outcome can be read into the Court of Appeal’s citation of Cuckmere Brick. In the Apple Fields case, the Court of Appeal made it quite clear that the question of the best price had to be determined in context and in accordance with the object of s 103A. It also made it clear that this had to be measured at the time of sale.

[76] The valuation evidence before me was that, when property is sold by way of mortgagee sale (or, to use the term preferred by the valuers, in a “forced sale situation”), there is a substantial discount from the market value that the property would achieve in a sale undertaken by an owner not under financial pressure to sell. That is a reality that cannot be ignored. It seems to me that the words of the section are clear and the substitution of the other words from decisions in other jurisdictions, or New Zealand decisions pre-dating the section, are of little assistance. What is required is an assessment of what is the best price that is reasonably obtainable for the property, if it is sold by the mortgagee in compliance with its duty under s 103A. In the Apple Fields case, McGrath J found it unnecessary to examine the question of best price further, because the case could plainly be decided on a consideration of whether reasonable care was taken by the mortgagee.

[77] Section 103A refers to “the time of sale”. The plaintiffs argued that this is the time at which Harts decided to sell, that is in late July 2000. On the other hand, Harts argued that the correct time is the time at which the mortgagee entered into a contract of sale: Countrywide Banking Corporation v Robinson [1991] 1 NZLR 75 at 77, and Apple Fields at paragraph 55. The time for assessing whether the price is the best price reasonably obtainable is the time of sale. In this case that was 4 August, subject to the later machinations relating to the contract with Mr Earwaker. But that should not be confused with the date at which the duty under s 103A arises, which is the date that the decision to sell is made. Countrywide (p 77) refers to the duty arising at the time of the mortgagee’s electing to sell, and Apple Fields (paragraph 55), refers to the mortgagee becoming subject to the duty of care “on deciding to sell”. That was 28 July 2000 in this case.

Duty To Act In Good Faith

[78] As already discussed, the Court of Appeal said in the Apple Fields decision (paragraph 47), that the duty of care imposed by s 103A and the equitable duty of good faith co-exist, but in most cases the duty of care will be the more onerous obligation. In the High Court, John Hansen J in that case cited with approval an extract from Hind McMorland & Sim, Butterworths Land Law in New Zealand, which describes the duty as an equitable rule that, since the mortgage is simply a security for the payment of debt, a power of sale conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and not for some other purpose (Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 194 at paragraph 48).

The Claims: Overview

[79] In my view, the key issue is whether Harts was in breach of its duty of good faith in selling the property to Mr Earwaker. I find that the sale to Mr Earwaker was not, in itself, a breach of that duty. I will set out my reasons for that finding at the outset.

[80] However, the sale to Mr Earwaker was still very significant to the outcome in this case. It was to a party sufficiently associated with Harts to trigger the principle that, where a mortgagee sells to a related party the mortgagee carries the burden of proof to show that it has taken all reasonable steps to obtain the best price reasonably obtainable: Tse Kwong Lam v Wong Chit Sen & Ors [1983] 3 All ER 54 at 59 and Apple Fields at paragraph 51. I find that Harts has not discharged that burden. I will set out my reasons for that finding and my conclusions on the appropriate remedy.

Sale to Mr Earwaker: Duty to act in good faith

[81] The plaintiffs allege that Harts breached its duty of good faith because it sold the property to Mr Earwaker, a person holding a position of responsibility at Realty Solutions, which constituted a breach of the prohibition against the sale by a mortgagee to an agent acting for the mortgagee on the sale.

[82] The essence of the plaintiffs’ case is that Mr Earwaker was an insider, in the sense that he was involved in the efforts being made by Realty Solutions to sell the property, knew the forced sale circumstances, knew what steps were being taken to sell the property through his overall supervision of the advertising undertaken by the agency, and attended the meeting with Harts’ personnel on 1 August 2000, when the proposed sale was discussed in circumstances where he had a conflict of interest. He was therefore in a position to know that the cash offers made to that stage were lower than $1,200,000 and that Harts’ strategy was to approach previous offerors, so that the competition was limited.

[83] The plaintiffs argued the general rule of equity that the person acting for the mortgagee in connection with the sale, ought not to take advantage of his position and become a purchaser, was not over-turned by the Real Estate Agents Act 1976, because that Act deals with purchases by real estate agents on specific conditions, but does not refer to a mortgagee sale. It deals with the position as between the real estate agent and the vendor, which, in the case of a mortgagee sale, is the mortgagee, not the mortgagor. It does not affect the law relating to the position of a mortgagee vis a vis a mortgagor. I accept that submission.

[84] While a real estate agent may be protected against attack from a mortgagee if he or she complies with the Real Estate Agents Act, that does not have any bearing on the outcome of any dispute about the propriety of the mortgagee’s actions in terms of its duty to the mortgagor. The purpose of the Real Estate Agents Act provisions is to protect principals who sell to their real estate agent from objectionable practices by the real estate agent; O’Hara v Harrison: Lewis v Harrison [1974] Recent Law 245. The principal in the current situation is Harts - the section simply does not address the position of Agio or Mr Krasniqi.

[85] Counsel for the plaintiffs, Ms Grant referred to a number of cases involving mortgagee sales to parties having some connection to the mortgagee. These were:

[a] Daniell v Griffiths & Ors (1883) 1 NZLR 340: The Court of Appeal referred to a rule of equity that a person acting for the mortgagee in connection with the sale ought not to take advantage of his position and become a purchaser. Ms Grant argued that the principle outlined in that case had not been overturned by the Real Estate Agents Act. For the reasons which I have already given I accept that submission;

[b] Sewell v The Agricultural Bank of Western Australia (1930) 44 CLR 104: A mortgagee sale to a servant of the mortgagee was held not to be wrongful because the servant’s role in looking out for possible purchasers had been fully performed and ceased to operate, and the servant had not taken active steps in relation to the mortgagee’s power of sale. The Court expressed the view that a sale to a servant of the mortgagee who was not acting for it in connection with the sale would not be unlawful. The plaintiff contrasted that with Mr Earwaker’s involvement in this case, together with his overall supervision of marketing undertaken by Realty Solutions (and in respect of the property), attendance at the auction and regular conferences with Ms Cameron regarding her sales activities (including those relating to the property). On the other hand Mr Earwaker had no involvement in the sense of actively engaging in soliciting of buyers for the property in the same way as Ms Cameron and some of her other colleagues.

[c] Martinson v Clowes (1882) 21 Ch D 857: A mortgagee sale by a building society involved a sale to the secretary of the Society who bought the property at an auction in which he disclosed his interests as an employee of the Society. North J expressed the view that a mortgagee exercising its power of sale could not purchase a property on its account and that this extended to a solicitor or agent of a mortgagee who was acting for the mortgagee in the matter of the sale. He declared that the sale was not valid or binding as against the mortgagor and ordered that if she redeemed the mortgage the property should be reconveyed to her;

[d] Parnell v Tyler (1833) 2 LJ Ch 195: A sale to a person who was otherwise independent of the mortgagee was set aside because the purchaser at the mortgagee sale had employed the clerk of the mortgagee’s solicitor to act for her;

[e] Hodson v Deans [1903] 2 Ch 647: A mortgagee sale by a friendly society was declared invalid because a member of the committee of the society responsible for organising the sale bid himself at the auction. The committee member knew the reserve price and had taken part in instructing the auctioneer who had been nominated by him;

[f] Farrar v Farrars Ltd (1888) 40 Ch D 395: There was a mortgagee sale by three mortgagees to a company in which one of them was a substantial shareholder, as well as being solicitor for both the mortgagee and the company. The Court of Appeal held this could not be characterised as a sale by a mortgagee to itself, which would have automatically invalidated the sale. However, it held the conflict of interest of the shareholder/solicitor (which the company knew about), was such that the burden of upholding the sale fell on the company which purchased the property. The Court found this burden was discharged because of the efforts made to secure a reasonable price;

[g] Tse Kwong Lam: This concerned a mortgagee who arranged a mortgagee sale by way of auction. There was minimal advertising and the mortgagee fixed the reserve price without consultation with the auctioneer. The only bid at the auction was from the mortgagee’s wife at the reserve price. She purchased the property on behalf of a company which was financed entirely by the mortgagee, the directors of which were the mortgagee, his wife and his son. The Privy Council applied Farrar v Farrars Ltd and held that there was no absolute rule that a mortgagee could not sell to a company in which it had an interest. However, in view of the conflict of duty and interests to which the mortgagee was subject, it was incumbent on the mortgagee to prove that reasonable steps had been taken to obtain the best price reasonably obtainable. The mortgagee failed to do so. The Privy Council said in those circumstances the general rule would be that the sale would be set aside, but in view of the delays in pursuing the case by the mortgagor, the sale was not set aside and the remedy was therefore damages.

[h] Apple Fields: At first instance, John Hansen J applied the Tse Kwong Lam case and this was upheld in the Court of Appeal. When delivering the Court of Appeal’s judgment, McGrath J said that, in circumstances where a mortgagee transfers the property to a party in which it has an interest, the burden of proof will be on the mortgagee to show compliance with the duty to take reasonable care to obtain the best price reasonably obtainable.

[86] Unusually, there do not appear to have been any cases in any Commonwealth jurisdiction in which a mortgagee sale to the real estate agent acting for the mortgagee in circumstances similar to this case has come before the Court for consideration. It may be that the market practice of real estate agents is to avoid this situation. While there are references in some of the earlier cases to a rule that a mortgagee must not sell to the agent acting for the mortgagee on the sale, there does not appear to be an absolute rule to that effect.

[87] Even if there were such a rule, the situation would be clouded in this case by the fact that the agency engaged by Harts was Realty Solutions, with the selling agent being Ms Cameron. Mr Earwaker was not himself the agent involved in the sale, although his supervisory role meant he had some advantages of an insider after Harts entered into possession, particularly knowledge that:

• It was a forced sale. It is not clear whether the other parties who were approached on behalf of Harts were told of this;

• Harts wanted to sell quickly and did not intend to re-advertise;

• Harts did not want to take the property to a mortgagee auction;

• Previous offers were lower than what he was proposing to offer. To be fair, that was knowledge he had by virtue of being a previous offeror as much as through his position at Realty Solutions.

[88] While Mr Earwaker’s role was somewhat distant from the action, this is not analogous with the Sewell case. The question therefore is whether the sale to Mr Earwaker, that is a sale by a mortgagee to a senior employee of the agency acting for the mortgagee on the sale, is unlawful. In my view the rule against a mortgagee selling to itself or its agent does not apply in this case. The approach taken in Apple Fields was to subject a sale where there is a potential conflict of interest to more rigorous scrutiny, not to outlaw it. The same approach is appropriate in the circumstances of this case.

[89] Apple Fields was a case involving a sale to a party in which the mortgagee itself had an interest. This case is different. Here the mortgagee did not have a financial interest in the purchaser, but the purchaser was not at arms length from Harts because the agency he worked for was engaged to undertake the sale and the employee principally responsible for the agency’s performance of the engagement was the de facto partner of the employee of Harts who was principally responsible for performance of its obligation under s 103A.

[90] I find that the sale by Harts to Mr Earwaker did not, of itself, constitute a breach of the duty to act in good faith. But I also find that the principle outlined in Farrar, Tse Kwong Lam and Apple Fields applies. That means that Harts carries the burden of proving that it complied with its obligation as mortgagee to take reasonable precautions to obtain the best price reasonably obtainable for the property. I will now evaluate the allegations by the plaintiffs that Harts breached that duty, bearing in mind that the burden of proof is on Harts to show that it complied with the duty.

Section 103A: (i) Failure to promote and market the property adequately

[91] The first argument made by the plaintiffs in relation to s 103A is that Harts did not adequately promote and market the property after it made the decision to sell by way of mortgagee sale and that this failure amounts to a breach of s 103A. Of course there was no advertising after Harts entered into possession so the issue is whether Harts was entitled to rely on the advertising by Realty Solutions before and after the auction, and possibly, the previous advertising by Bayleys during the four week marketing campaign at the end of 1998. Harts argued strongly that it was entitled to rely on the previous advertising campaigns and, in particular, disputes the plaintiffs’ contention that the advertising campaign undertaken by Ms Cameron was deficient and inadequate.

[92] The defendants rely in particular on the decision of the Court of Appeal in Schollum v Graham, in which the Court of Appeal found no breach of the duty to take reasonable care to obtain a proper price. In that case, the mortgagee instructed the same real estate agent as had been previously engaged by the mortgagor to sell the property, no further advertising campaign was undertaken, and the agent approached potential purchasers who had previously expressed interest. The property was sold by the mortgagee for $205,000. Unbeknown to the mortgagee, the mortgagor was also trying to sell the property and found a purchaser for $315,000.

[93] The Judge at first instance had given as his reasons for finding there was no breach of the duty that:

• The lodge was difficult to value;

• The mortgagee was entitled to have regard to the two unsuccessful marketing campaigns in 1992 and 1993 (the sale took place on 20 January 1994), even though they were seeking a higher price;

• The mortgagee had allowed the mortgagor a generous time to sell before taking enforcement action;

• The mortgagee was entitled to rely on the opinion of the real estate agent previously engaged by the mortgagor as he probably knew more about the market value of the lodge than anybody else and had prepared a comprehensive report on the previous sale campaigns and his efforts to find buyers;

• The price achieved was not dramatically different from the opinions expressed by valuers;

• The alternative offer obtained by the mortgagor included plant and chattels (the mortgagee sale price did not), and the prospective purchasers had been misled by the mortgagor to the effect that there was no mortgagee sale pending.

[94] The decision of the High Court was upheld by the Court of Appeal. Applying these criteria to this case, Harts argued that:

• As with the lodge in Schollum v Graham the property was difficult to value. The extreme range of the valuations referred to earlier support that contention. If it were not correct there would be no other explanation for the valuations being so hard to reconcile with each other;

• The mortgagee could have regard to the marketing campaigns by both Bayleys and Ray White. I do not accept it is reasonable for the mortgagee to rely on the Bayleys’ campaign, which was well over a year before the relevant time, and lasted only 3-4 weeks, was seeking a price of $2,600,000 and about which Mr Tallentire appeared to have no detailed knowledge at all. Mr Tallentire did not ask Mr McRae for any information about the Bayley’s campaign. It is simply not open to Harts to claim reliance on a marketing campaign when it made no inquiries as to the nature of that campaign, which is in contrast to the situation in Schollum v Graham. The question which arises as to the Ray White campaign, is whether it was such that Harts was justified in relying on it, and whether the relationship between Mr Tallentire and Ms Cameron was such that Harts should not have proceeded to rely on it without getting independent verification of the nature of the campaign and its adequacy for the purpose. That is a key issue to which I will revert later;

• The mortgagor had been allowed a generous amount of time to negotiate a sale I accept Mr Krasniqi was also given a reasonable period to sell;

• The mortgagee had taken expert opinion about the value. Harts argued that the valuation it had obtained from Hardie Shalders Restall in early July 2000, which indicated a valuation of $2,000,000 (in contrast to its earlier valuation of $2,650,000) and a forced sale value of $1,300,000, fulfilled this requirement. I accept Harts took this advice, but the situation is somewhat different from that facing the Court in Schollum v Graham where combined advice on value and also the conduct of the previous campaigns was taken from the real estate agent who conducted the marketing campaigns and the agent was at arms length from the mortgagee. The agent in Schollum v Graham appeared to recontact everyone who had expressed interest in the property during previous campaign, whereas Realty Solutions was told only to approach previous offerors;

• The price achieved was not dramatically different from the opinions expressed by the valuers. In Schollum v Graham, the two valuations were $265,000 (making allowance for an urgent sale) and $215,000, and the sale price was $205,000. In this case, the sale price was within a plus or minus 10% range of the forced sale valuations from the time, but significantly lower than the open market valuations.

• The last point in Schollum v Graham does not apply to this case.

[95] I have dealt with the evidence relating to the Realty Solutions’ campaign, both before and after the auction, and found that it was satisfactory in terms of the budget authorised. That does not necessarily mean that Harts was entitled to rely on it, however. The positions taken by both the plaintiffs and the defendant in this regard seems to be internally inconsistent.

[96] The plaintiffs’ position was that Harts was really in control of the marketing campaign both before and after the auction because of the entitlement it had under the mortgage offer to control the process, as Mr Tallentire directed Mr Krasniqi to instruct Ms Cameron and because of the subtle pressure on Mr Krasniqi to sell. Yet, at the same time it said that Harts was not entitled to rely on a campaign it was allegedly in control of.

[97] On the other hand, Harts argued that it had no involvement in the campaigns before the end of July 2000. Its involvement with the appointment of Ms Cameron was a mere indication of her availability. It took no role at all in supervising the campaign or even in ascertaining what the campaign involved. Despite this, it seeks to rely on the campaign without any evidence that it made any inquiries at all as to the campaign’s nature, budget, appropriateness, or adequacy properly to test the market and attract potential purchasers. In this respect the case differs from Schollum v Graham where a full report was obtained from the (independent) real estate agent responsible for the earlier campaigns. It was argued that Harts relied on Mr Krasniqi’s assurance as to the adequacy of the marketing campaign because he had said in a letter to Harts that the marketing possibilities had been exhausted. I do not accept that Harts was entitled to treat that as an assurance or rely on it without making proper inquiries of its own. Harts knew that Mr Krasniqi was seeking the appointment of another agency to market the property.

[98] Mr Tallentire did not seek any form of report from Ms Cameron, and notwithstanding his personal relationship with her, did not monitor the nature or quality of the campaign. He said he discussed the advertisements with her and others at Realty Solutions over a period of time, but not with Mr Earwaker. He said he did not know how many years of real estate experience Ms Cameron had, what her experience was in selling high value properties or what experience she had in mortgagee sales. He was therefore not justified in making an assumption that any campaign which she was in charge of to sell the property would, by definition, be satisfactory.

[99] In the circumstances, I find that Harts cannot justify a position of unquestioningly accepting that the previous campaign by Realty Solutions was a proper testing of the market, and proceeding without any advice or evaluation of the campaign to a decision to undertake a mortgagee sale without any form of advertising at all. The marketing campaign was at least open to question as to its adequacy, whether that arose from an inadequate budget or otherwise; the agent concerned was inexperienced, as was the agency for which she worked, at selling properties of high value and conducting mortgagee sales; and, most importantly, she had been recommended by Mr Tallentire himself without any real evaluation of her ability to undertake the task, given his personal relationship with her.

[100] Before unquestioningly accepting the campaign which Ms Cameron had managed, effectively adopting it and making a decision to sell to Mr Earwaker, Harts ought to have undertaken a proper evaluation with advice from an unconnected party with appropriate qualifications to determine whether that was a prudent action in view of Harts’ duty under s 103A. As in Tse Kwong Lam, the failure to take such advice in this case makes it very hard for Harts to establish that the method of sale it chose was justified in the circumstances. It did not put forward independent expert evidence that proceeding to sell in the manner it did was prudent, or that the advice it might have got if it had sought it would have been to do exactly what it did. The burden of proof is on Harts; it has not established on the balance of probabilities that its actions were sufficient to meet its obligation under s 103A in this regard.

Section 103A: (ii) Failure to accept Jolly Farmer offer

[101] The second argument made by the plaintiffs in relation to s 103A is that Harts was in breach of that section because it failed to accept the Jolly Farmer unconditional offer, which was $50,000 higher than the price Harts accepted from Mr Earwaker.

[102] The plaintiffs rely on Nathan Securities Limited v Stavefield Holdings No 29 Limited (CA6/93, 1 July 1993). In that case, the Court of Appeal upheld a finding by Williamson J in the High Court that the manager of the mortgagee had formed such an unfavourable view of the mortgagor’s representative that he was prepared to overlook information in his possession and to align himself with a third party lessee of the mortgaged property, rather than support the mortgagor’s contentions. This was one of the factors leading to a finding that the mortgagee had not acted with reasonable care to obtain a proper price in that case.

[103] Mr Tallentire acknowledged in evidence that he was annoyed at receiving the offer from Jolly Farmer and did not attempt to contact Mr Krasniqi to find out who was behind it, even though there was time for him to do so prior to the expiry of Mr Earwaker’s offer at 5 pm on 4 August 2000. While it would obviously have been preferable if he had made such inquiries, it is unlikely that they would have yielded sufficient certainty as to the identification of the person behind the offer and the availability of funding from a creditworthy source before the deadline for Mr Earwaker’s offer had passed.

[104] The plaintiffs asked me to make a finding that Mr Ridge was the person behind the Jolly Farmer offer, that he had the finance available, and that an inquiry by Mr Tallentire would have revealed those facts. I am unable to do so. Mr Ridge’s evidence on the point was extremely vague and uncertain. It stopped short of an explicit statement that he was behind the Jolly Farmer offer and that the offer was made with his knowledge and with the funding in place. While some allowance can be made for what Mr Ridge himself acknowledged as his poor memory, I did not find it credible that he would not remember an offer of this magnitude being made, or that he would allow an unconditional offer to be made on his behalf without the necessary funding being arranged.

[105] It was clearly open to Mr Krasniqi or his secretary to inform Harts that Mr Ridge was behind the offer at the time that offer was sent to Realty Solutions. That would have given it greater credibility than it had. For reasons which were not adequately explained, they did not do so. Mr Ridge said he used trusts to hide his identity, but the later Okinawa offer was clearly acknowledged as being for a trust established by him, and there seems no reason why this could not have occurred with the Jolly Farmer offer.

[106] The circumstances and nature of the Jolly Farmer offer are such that I find Harts was not in breach of its duty under s 103A in discounting it from consideration. I find that, even if Harts had made inquiries as the plaintiffs suggest they ought to have, those inquiries would not have yielded sufficient certainty for Harts to consider the Jolly Farmer as a genuine alternative to Mr Earwaker’s offer.

Section 103A: (iii) Failure to pursue the Okinawa Trust offer

[107] The third ground advanced by the plaintiffs in relation to s 103A was Harts’ failure to pursue negotiations with an alternative potential purchaser, namely Okinawa. Okinawa’s offer was originally directed to Agio on 10 August 2000, but, of course, Agio was no longer in a position to accept it, because Harts had entered into possession and contracted with Mr Earwaker to sell the property to him. However, the grant of the ex parte injunction to Agio and Mr Krasniqi on 15 August 2000 meant that Harts could cancel the Harts/Earwaker contract and it also transpired that the valuation prepared by Mr Edwards to comply with s 64 of the Real Estate Agents Act did not comply with that section, so that Harts was entitled to void the contract with Mr Earwaker. Thus Harts was in a position to accept the offer subsequently made to it by Okinawa.

[108] Mr Edwards valued the property at $1,500,000 but said that its value on a forced sale basis was $1,200,000. That forced sale value was interpreted by both Harts and Mr Earwaker as the valuation for the purposes of s 64 but whether that is correct is a matter of conjecture: the plaintiffs argued it was the market value that was relevant under s 64 There is no need for me to make a finding on that issue in this case because it is clear that, even if the $1,200,000 forced sale valuation is sufficient under s 64, the valuation obtained by Mr Earwaker did not comply with the section. That is because the valuation excluded chattels which were included in the sale to Mr Earwaker. Section 64 requires a valuation of the “land” which is defined in the Real Estate Agents Act as including chattels. In this case, the valuation had to be of the land and buildings as well as the chattels, but was only of the land and buildings.

[109] By definition therefore, the forced sale valuation of $1,200,000 for land and buildings, when Mr Earwaker was purchasing land, building and chattels, did not comply with s 64. Assuming the chattels had some value (and even Mr Earwaker was ultimately prepared to pay $35,000 for them), a complying valuation would have to have been higher than $1,200,000, so a complying valuation would have been greater than the valuation in the consent form for the whole purchase.

[110] The valuation prepared by Mr Edwards was either not a valuation of the property subject to the Harts/Earwaker contract, and therefore the consent given by Harts was deemed not to have been given under s 64(3), or was a valuation greater than that specified in the consent, making the contract voidable at the option of Harts.

[111] It is notable that the judgment of Chambers J dated 8 September 2000 in relation to the injunction proceedings records that counsel for Harts had informed him that Harts had a right of cancellation by virtue of both clause 15 of the contract and ss 63 and 64 of the Real Estate Agents Act. Counsel told Chambers J that Harts would almost certainly avoid or discharge its agreement with Mr Earwaker and either recontract with him or someone else at a higher price. It seems clear therefore that Harts believed that the state of compliance with the Real Estate Agents Act at that stage was deficient and that avoiding the contract under that Act or cancelling it under clause 15 were both options available to it.

[112] In fact, Mr Earwaker threatened legal proceedings if the contract were cancelled under clause 15 (because the injunction had by then been discharged), and Harts chose to negotiate a higher price with him to reflect the value of the chattels - this is why the final price was $1,235,000 rather than $1,200,000 as offered by Mr Earwaker on 4 August 2000.

[113] As the Harts/Earwaker contract of 4 August 2000 became voidable at the option of Harts, leaving Harts the ability to pursue alternative sales opportunities, I believe that the obligation under s 103A continued during the period that the contract with Earwaker was voidable, until the new purchase price of $1,235,000 was agreed with him. At that point, Harts effectively contracted away its rights to cancel or avoid the earlier contract and confirmed its arrangements with Mr Earwaker, subject to the increased price.

[114] Harts argued that the reason it did not pursue negotiations with Okinawa was that Mr Earwaker had placed a caveat on the property on 5 September 2000 (the day before the defended injunction hearing before Chambers J), and had, through his lawyers, threatened to sue Harts if it purported to cancel the contract with him, seeking an injunction to prevent cancellation and damages.

[115] Harts took the view that such proceedings could be lengthy and the delay in resolution meant that interest kept running on the $1,200,000 price payable under the Harts/Earwaker contract for that period. Assuming the period was three months, the interest on $1,200,000 at the penalty rate then prevailing (17.8%), would have been about $53,000, and there would have been legal costs on top of that. I discount the legal costs because they have to be weighed against the inevitability of proceedings from the plaintiffs, which would also cause legal costs to be incurred by Harts.

[116] I accept it was a valid consideration for Harts to take into account the costs of a delay in settling with Okinawa, if that offer was pursued as a result of the need to discharge the Earwaker caveat and resolve any proceedings commenced by him.

[117] The difficulty I see in the approach taken by Harts is that it appears to have analysed the risk and rewards of pursuing the Okinawa offer without any discussion at all with Okinawa and without any attempt to persuade Okinawa to increase its offer, notwithstanding the signals it was receiving from Okinawa’s solicitors that there was a possibility this would occur. Indeed, Okinawa did increase its offer to $1,350,000 when it became aware of an impending settlement with Mr Earwaker, but, as it transpired, the increased offer was received by Harts after they had settled with Mr Earwaker.

[118] There was some dispute as to the genuineness of this increased offer and I accept that its timing gives good grounds for some scepticism. But Harts never explored with Okinawa or Mr Ridge what it or he was prepared to pay, and therefore never properly informed itself of the potential rewards of the Okinawa offer so that it could put itself in a position to make a proper comparison of the risks and rewards of dealing with Okinawa. It did not appear to have any doubts about the genuineness of the Okinawa offer (the judgment of Chambers J confirms that) and if it did, they would have been unjustified because Mr Ridge had personally guaranteed performance and Harts had an undertaking from Fortune Manning to settle at $1,300,000.

[119] In addition to the Okinawa offer, Harts also had Mr Ridge’s undertaking to bid at a mortgagee auction at $1,300,000 so that the auction was effectively underwritten. Again, it never explored this possibility with Mr Ridge, so it never placed itself in a position to evaluate the potential benefits against the risk of delay and cost through the threatened proceedings from Mr Earwaker and the need to discharge his caveat.

[120] No adequate explanation for the failure to deal with Okinawa was provided by Harts. Mr Tallentire gave evidence of the perceived risks (delay and cost) but no evidence of any attempt to quantify the rewards of dealing with Okinawa - perhaps not surprisingly since, without discussions with Okinawa, Harts could not have known what the potential rewards were. Mr Taylor of Harts gave similar evidence to that of Mr Tallentire.

[121] I find that Harts has not discharged its obligation to prove that it was not in breach of its duty under s 103A in failing to follow up the Okinawa offer and to attempt to negotiate a more favourable transaction with Okinawa, so that it could then properly inform itself of the risks and rewards of treating with Okinawa as compared to those arising from cancelling/avoiding the contract with Mr Earwaker, or negotiating with him to increase his offer. Even if it had not eventually pursued the Okinawa opportunity a higher offer from Okinawa may have provided an incentive to Mr Earwaker to increase the price he was prepared to pay, given that the Harts/Earwaker contract was able to be cancelled or avoided. Whether that breach caused any loss to the plaintiffs is an issue to which I will revert later.

Section 103A: (iv) Failure to obtain the best price reasonably obtainable

[122] The fourth ground relied on by the plaintiffs in relation to s 103A is that Harts did not obtain the best price reasonably obtainable. That is not the obligation which s 103A placed on Harts - the obligation was to take reasonable care to obtain the best price reasonably obtainable. This ground seems to be a “catch all”.

[123] In addition to the three specific grounds already dealt with, the nature of the failures contended for by the plaintiffs were:

[a] Selling too quickly: the plaintiffs referred to Seafarer Fishing Co Ltd v Broadlands Finance Ltd (High Court, A35/77, 17 August 1984, Roper J), where he referred to a sale of a boat having a value of about $50,000, pursuant to a tender which remained open for one week as being in “almost indecent haste”. That was a case concerning the duty to act in good faith, but it predates S 103A. In this case the position is affected by the previous sales efforts and the issue is largely as to whether it was open to Harts to rely on the earlier sales campaigns - I have already dealt with this and do not believe there is anything in this ground of the claim which adds anything to the specific first ground of complaint;

[b] Not taking time to consider the true nature of the asset. In this respect the plaintiffs relied on the Nathan Securities case and particularly the comment by the Court of Appeal that the mortgagee in that case was required to have regard to the true nature of the asset, because it was only then it could obtain a fair price for it. The plaintiffs argued that the same consideration applied in this case because of the unique nature of the property and the limited market for it. Again, I do not believe this ground of complaint adds anything to the specific first allegation with which I have already dealt.

[c] The sale was collusive. This essentially relates to the fact that Mr Earwaker was associated with Realty Solutions. I have already given my views on this allegation.

[d] The sale was not adequately advertised, in particular by not highlighting key features such as the view; The question of the need for, or adequacy of, the advertising depends on whether it was open to Harts to rely on the earlier advertising campaign and I have already dealt with this;

[e] Adequate professional advice was not obtained. I have dealt with this in relation to the first ground of complaint of breach of s 103A. There is no need for separate consideration of it in this context.

[124] There is nothing new in the fourth ground, and the plaintiffs’ case based on this ground therefore fails.

Duty to act in good faith: Appointment of Ms Cameron

[125] In addition to their claims of breaches of s 103A, the plaintiffs alleged that Harts breached its duty to act in good faith when it arranged for Donna Cameron to market and advertise the property in circumstances where she was not appropriate, or alternatively was not the best real estate agent to obtain the best price reasonably obtainable at the time of sale.

[126] In her opening, Ms Grant characterised this breach as “directing the appointment of Ms Cameron as listing agent when she was the de facto wife of the manager with power over the mortgagor and guarantor”. In this respect, she appeared to be referring to the recommendation of Ms Cameron made by Mr Tallentire to Mr Krasniqi in April 2000. In his decision in the High Court in Apple Fields, John Hansen J said (at paragraph 54), that the duty to act in good faith may extend over a longer period leading up to the sale than the s 103A duty which arises at the time the mortgagee decides to sell. On that basis, the fact that the action which the plaintiffs complain of pre-dated the time of sale by some months does not necessarily rule it out as an actionable breach of the good faith duty.

[127] Notwithstanding that, I do not accept that that recommendation of Ms Cameron, in the circumstances in which it was given, amounted to a breach of a duty of good faith. It was no more than a recommendation which had no binding force on the mortgagor. Although, as I have already found, it was inappropriate for Mr Tallentire to make the recommendation, I do not accept this could itself amount to a breach of the duty or that it tainted Harts’ subsequent actions, some three months later, when it took over responsibility for selling the property in its capacity as mortgagee.

[128] Mr Krasniqi acknowledged he knew of the relationship between Mr Tallentire and Ms Cameron a short time after he appointed Ms Cameron to sell the property and that he did nothing about it at that time. While I have accepted there was a degree of pressure on Mr Krasniqi, I do not think it was such that, if he believed Mr Tallentire’s actions compromised the likelihood of sale, he could not then have raised the issue with a view to terminating the appointment or making arrangements to involve an independent agent.

[129] In her closing address, counsel for the plaintiffs changed position somewhat and argued that the breach of the duty of good faith was the appointment of Ms Cameron as Harts’ agent. Of course this occurred in late July, immediately after Harts had entered into possession of the property. She argued this meant there was no independent scrutiny of the earlier campaign undertaken by Ms Cameron and Realty Solutions, and that the mortgagee therefore breached its duty by failing to obtain any independent expert advice as to the past campaign and how to perform its best endeavours to achieve the market value at the time.

[130] That largely mirrors the plaintiffs’ argument as to the breach of s 103A and I have already accepted its validity in that context. I do not therefore find it necessary to evaluate it in this context as the outcome will not be affected whether I accept or reject it as evidencing a breach of the duty of good faith as well. I acknowledge that the duty to act in good faith is owed to the guarantor (Mr Krasniqi), whereas the equivalent s 103A duty is not, but nothing turns on that difference in this case.

Conclusion

[131] I conclude that Harts has not discharged the onus on it to establish that it has complied with s 103A and the duty to act in good faith. Accordingly, applying the principle set out in Tse Kwong Lam and Apple Fields, I find that Harts is liable to the plaintiffs for breach of duty.

REMEDY

Setting aside the sale

[132] As already discussed, both Tse Kwong Lam and Apple Fields are authority for the proposition that where a mortgagee fails to persuade the Court that it took reasonable precautions and that the interested party bought at the best price reasonably obtainable, the remedy as a general rule will be to set aside the sale and restore to the borrower the equity of redemption. In both cases it was also said that if that remedy was inequitable the Court’s remedy will be confined to damages.

[133] Counsel for Mr Earwaker, Ms Hunt, strongly resisted the plaintiffs’ submission that the sale should be set aside. She argued that Mr Earwaker was a bona fide purchaser without notice, and therefore had an indefeasible title to the property in terms of s 62 of the Land Transfer Act 1952. She went so far as to suggest that if the sale was set aside, it would be a “most extraordinary event in legal history” requiring the rewriting of text books and changing of courses to law students. She also said it would be inequitable in the circumstances because Mr Krasniqi did not have “clean hands”.

[134] Counsel for Harts, Mr Gustafson, also argued that the plaintiffs did not have clean hands and did not do equity and therefore could not seek equity. He said Mr Krasniqi had acquiesced in the sale to Mr Earwaker and this was another factor suggesting the equitable remedy setting aside the contract should not be provided and any damages should be reduced accordingly.

[135] In Apple Fields, John Hansen J considered the question of what remedy should be available if a breach of s 103A or the duty of good faith had occurred (he found no breach but considered the issue in case he was found to be wrong on that point). He found that unwinding the contracts in that case would be inequitable, first because it would have given the mortgagor an unjustified windfall of about $8,000,000 and the parties could not be put back into their pre-sale position. Secondly, the idea for the mortgagee sale in that case came from the mortgagor and its solicitor. Although this would not excuse a breach of s 103A, it was relevant to a consideration of the equities.

[136] I find that it would be inequitable to set aside the sale in this case and I therefore exercise my discretion against granting that equitable remedy. My reasons for coming to that conclusion are:

[a] There is a substantial shortfall for which Harts must rely on its limited recourse covenant from Agio and the personal guarantee of Mr Krasniqi. Even on the plaintiffs’ view of events, a sale in conformity with its views of the duties faced by Harts, would still have yielded a significant shortfall. (I will deal with this in more detail later). This is not a case therefore, where a mortgagor has lost its equity in a property as a result of the mortgagee’s action, but rather one where the extent of the shortfall may have been made greater. In these circumstances it is not feasible to return the parties to the position they were in prior to the sale, especially as the evidence before me was that Agio had no assets from which to meet its personal liability and Mr Krasniqi did not appear to be in a position to meet the liability either. If the plaintiffs were in a position to redeem the mortgage immediately or seeking to protect an equity of redemption where the value of the property was likely to exceed the amount owed (bearing in mind another year of accruing interest at penalty rates on the amount which remains outstanding under the mortgage), the situation may be different. Although I have found Harts to be in breach of its duty, I believe it would be inequitable to Harts to set aside the sale in the circumstances of this case;

[b] It would also be inequitable to Mr Earwaker to set aside the sale. There are grounds to be critical of his actions in some respects, particularly that he pressured Harts to sell before 4 August 2000 and threatened legal action against Harts later, but I accept he disclosed his interest and acted on legal advice throughout. In addition, he has now altered his position by undertaking extensive renovations to the property, some of which were necessary to deal with items of deferred maintenance. This is not of itself decisive because, as the plaintiffs rightly pointed out, he cannot manufacture his own detriment and then rely on it as a basis for opposing a remedy against him. However, the reality is Chambers J made a finding in the interim injunction proceedings that damages would be an adequate remedy for the plaintiffs and ruled against a permanent injunction restraining the sale from proceeding. Chambers J’s consideration of the matter was in the context of an injunction, where the test was the balance of convenience and was made in circumstances where he was told the sale to Mr Earwaker was likely to be avoided. Nevertheless, his decision was an indicator that the subsequent focus of the case would be on damages and that provides at least some basis on which Mr Earwaker could feel justified in proceeding with the renovations, some of which needed to be undertaken urgently;

[c] Mr Krasniqi’s own conduct is subject to criticism and he cannot be said to have entirely clean hands, or to have acted equitably himself. As he effectively acted at all times on behalf of Agio, his also conduct also counts against Agio. I have already referred to his setting the vendor bid at the auction in May 2000 (in which I found that his version of events in his evidence was not correct), and I have also found that he was obstructive and difficult during the process leading up to and after the auction, in a way which was unhelpful towards securing a sale. The circumstances of the Jolly Farmer offer were highly dubious. In view of the significant detriment that would arise for the defendants if I were to set aside the sale and that damages are, in my view, an adequate remedy in the circumstances, his conduct is a relevant factor in determining not to exercise my discretion in his favour.

[137] I do not accept the defendants’ argument that Mr Krasniqi’s conduct can amount to acquiescence in the breaches of duty. I accept he appointed Ms Cameron to act on the sale in April 2000, but I do not accept this amounts to acquiescence in her appointment by Harts after it entered into possession. Similarly, I accept he had been prepared to deal with Mr Earwaker prior to Harts entering into possession in that he had countersigned two offers made by Mr Earwaker, which involved giving consent to a sale to Mr Earwaker under the Real Estate Agents Act. However, that does not constitute acquiescence in a subsequent sale by a mortgagee to Mr Earwaker at a price considerably lower than the prices in the counter-offers signed by Mr Krasniqi (which were $1,800,000 and $1,500,000 respectively).

[138] In view of my conclusion that it would be inequitable to set aside the sale, I do not need to deal with the argument made by Ms Hunt on behalf of Mr Earwaker that he has an indefeasible title to the property, which prevents me from granting the remedy of setting aside the sale. On the face of it the exceptions to the principles of indefeasibility do not easily accommodate the setting aside of a sale in these circumstances, but I note that neither the Court of Appeal in Apple Fields nor the Privy Council in Tse Kwong Lam saw any difficulty in that regard. If the submission is correct it would seem to place a substantial fetter on the ability of the Court to grant this remedy.

[139] Ms Hunt also argued that under clause 8 of the Fourth Schedule to the Property Law Act, purchasers are protected from mortgagees, but as the mortgage excluded the Fourth Schedule, this argument failed. She also argued that Mr Earwaker was entitled to similar protection under clause 6(d) of the mortgage, but I do not accept that that provision would override an order of the Court setting aside a sale where the mortgagee is in breach of its duty to the mortgagor. However, the issue does not require determination in this case.

[140] The relationships between s 103A and the concept of indefeasibility, and s 103A and clause 8 of the Fourth Schedule, are issues which should be addressed by the legislature if steps are taken to implement the Law Commission’s report on the reform of the Property Law Act.

Damages

[141] The appropriate remedy in this case is damages. My conclusion on this aspect mirrors those of Chambers J in the interim injunction proceedings, although his decision was made in a different legal context.

[142] Assessment of the level of damages requires consideration of the nature of the breach and an examination of the likely outcome if the breach had not occurred.

[143] As already stated, I believe that, in order to comply with its duty to the plaintiffs, Harts would have been required to take independent advice as to what steps it should then take. To assess damages, I therefore need to evaluate what the advice would have been and what Harts, acting prudently and in compliance with its duty under s 103A would have done.

[144] From the plaintiffs’ point of view the evidence of Mr McRae was that if he had been asked for advice in those circumstances, he would have advised a sale by auction with a five week lead time and a budget of approximately $10-12,000. However, Mr McRae did not claim to be an expert in mortgagee sales. He said if the matter had been referred to him he would have referred it on to another agent at Bayleys with that experience. There was no expert evidence on the part of the defence about what advice it would have received if it had sought it.

[145] There is room for conjecture as to what advice Harts would have obtained if it had sought any. The Court in Schollum v Graham warned against conjecture about alternative methods of sale. However, there the mortgagee was found not to have breached its duty, in contrast to this case where the burden of proof was on Harts and it failed to discharge it. The difficulty in establishing what would have occurred if there had been no breach, especially in the absence of expert evidence, leaves me in a position where the only realistic basis for the assessment of damages is to establish the difference between the best price reasonably obtainable at the time of sale, and the price actually achieved. That is the approach adopted by the Privy Council in Tse Kwong Lam at p 64.

[146] Ms Grant submitted that I should not assume a forced sale outcome in assessing the best price reasonably obtainable, or that I should apply only a 13.33% forced sale discount as the Court did in Nathan Securities. I do not accept that the approach taken in that case is appropriate here, because the factual situation being considered by the Court was quite different. The breach of duty by the mortgagee in that case was failing to take steps to put in place a long term lease for purpose-built premises and it appeared to be common ground that the preferable method of sale would have been by private treaty, where it may have been possible to manage the sale without disclosure of the fact it was a mortgagee sale.

[147] That is in stark contrast with this situation. Here the plaintiffs’ own witness argued that the step which should have been taken was a mortgagee auction. That is a classic forced sale situation, ie where it can be assumed from the outset the involvement of the mortgagee will be known. In the absence of evidence as to special factors indicating non-disclosure of the mortgagee’s involvement, I believe the forced sale value is the correct benchmark for assessment of damages.

[148] Ms Grant argued that I should start from a market value of $1,900,000, which is an average of the valuation of $1,800,000 done by Mr Gardner on 4 August 2000 and that of $2,000,000 of Mr Pheasant on 6 July 2000. A deduction of 13.3% from that average figure would yield a “true market price” of $1,560,000. I do not accept this is the appropriate basis for calculation. A mortgagee sale by way of auction would have clearly been a forced sale.

[149] The forced sale valuations presented in evidence were those of Mr Pheasant (6 July 2000), $1,300,000, Mr Edwards (8 August 2000), $1,200,000, Mr Gamby (October 2000), $1,300,000 and Mr Colcord (February 2001), $1,350,000. The first three valuations excluded chattels, whereas that of Mr Colcord included chattels. Apart from the valuation of Mr Edwards there is a reasonable unanimity among the valuers at around the figure suggested by Mr Colcord, who I found to be a compelling and credible witness. His valuations of the property had a degree of consistency and realism lacking in those of Mr Pheasant and Mr Lyons.

[150] Mr Colcord’s criticisms of the valuations prepared by Mr Pheasant and Mr Lyons was, in my view, justified. I do not find Mr Pheasant’s and Mr Lyons’ valuations helpful in assessment of value, although I note that Mr Pheasant’s forced sale valuation at $1,300,000 excluding chattels is consistent with the other forced sale valuation evidence.

[151] Mr Colcord’s own valuation was based on an inspection in March 2000, but that does not appear to have been a material factor. His valuation is reconcilable with that of Mr Gamby which excludes chattels. In his brief of evidence, Mr Gamby said that if he had included chattels (disregarding items which had been classified as chattels but were really fixtures), his forced sale valuation would have been $1,350,000.

[152] Based on the valuation evidence before me, I find that the forced sale value of the property at the time of the sale by Harts, inclusive of chattels and GST, was $1,350,000. I also find that that was the best price reasonably obtainable at the date of sale. The difference between the price paid by Mr Earwaker (1,235,000) and $1,350,000 is $115,000.

[153] In my view it would have required some expenditure by Harts and some delay in effecting the sale to achieve that, and it is therefore appropriate to make some allowance for those costs and the interest which would have accrued during the period of the delay to reflect what Harts would have received on a net basis. Mr McRae recommended $10-12,000 be spent on advertising, with a five week period of promotion. While his views are not determinative, an allowance to cover marketing costs and continued interest costs is appropriate. I consider that $25,000 sufficiently reflects these two factors, and I therefore award damages to Agio of $90,000.

[154] On behalf of Harts, Mr Gustafson argued that any damages should be reduced to reflect the conduct of the plaintiffs. In the High Court decision in Apple Fields John Hansen J said he would have reduced damages by 50% because of the very close involvement the mortgagor had in events leading up to the mortgagee sale. I do not accept there are any factors in this case which are analogous and I therefore decline to reduce the damages.

[155] For completeness, I set out my assessment of damages relating to the failure to pursue the Okinawa offer, to demonstrate that for that breach the damages amount to less than $90,000, so that the $90,000 is the correct assessment of damages in this case.

[156] I assess damages for that breach as follows. If Harts had accepted the Okinawa offer it would have received $1,300,000. Ms Grant argued that I should take into account the subsequent increased offer of $1,350,000, but I do not accept that would be appropriate in the circumstances. That increased offer was made in circumstances where it is unclear whether it was authorised by Mr Ridge and apparently after the sale to Mr Earwaker had been settled, so there are real doubts as to its genuineness.

[157] There is an issue as to whether a decision to treat with Okinawa would have led to a higher bid from Mr Earwaker and possibly a Dutch auction, but I believe the more likely outcome is Mr Earwaker would have attempted to disrupt a sale to Okinawa by legal action, and would not have been likely to have over-bid Okinawa, which would have had no incentive to increase its offer either. So that the starting point for assessment of damages in relation to this breach is $1,300,000.

[158] I accept some delay in settlement would have been caused by the likely dispute with Mr Earwaker (including discharging his caveat), during which interest would have continued to run at penalty rates. But that must be balanced by the delay arising from not dealing with Okinawa, caused by this litigation. The difference between the two was not likely to have been significant and therefore I make no allowance for this factor.

[159] I was asked to make an allowance for the legal costs which would have been incurred in fighting Mr Earwaker and having his caveat discharged, but I decline to do so. Whichever step Harts took, it would have had a claim against it, either by the plaintiffs or Mr Earwaker. So legal costs would be incurred one way or the other, and I also find this is a neutral factor.

[160] Accordingly, the damages arising from this breach would have been the difference between the Okinawa offer price of $1,300,000 and the price paid by Mr Earwaker of $1,235,000, which is $65,000. As this is lower than the $90,000 damages for breach as outlined above and the loss is the same loss, the $90,000 figure is the correct measure of damages in this case.

COUNTERCLAIM BY HARTS

[161] The plaintiffs raised no objection of any kind to the Harts’ counterclaim and I find that Harts is entitled to judgment for the amount now owing under the mortgage, less a credit for the damages of $90,000, against Agio, and entitled to judgment against Mr Krasniqi for the same sum as guarantor. Counsel for Harts should file a memorandum as to the exact amount for which judgment should be entered within seven days of the date of this judgment, with any memorandum in reply from the plaintiff to be filed within three working days after the date that the Harts’ memorandum is served on counsel for the plaintiffs.

COSTS

[162] It was agreed by all parties that the question of costs should be reserved. The plaintiffs should file a memorandum as to costs within 14 days of the date of this judgment, with any memoranda in reply from the defendants to be filed within seven days after that.