Harts Contributory Mortgages NomineeCompany Limited v Bryers HC Auckland Cp403-Im00

[2001] NZHC 1316

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP403-IM00

BETWEEN HARTS CONTRIBUTORY MORTGAGES NOMINEE COMPANY LIMITED (formerly known as REEVES MOSES HUDIG MORTGAGE NOMINEE COMPANY LIMITED)
Plaintiff

AND MARK RONALD BRYERS
Defendant

Hearing: 8 and 9 May 2001

Counsel: J Long and Mr Flannagan for plaintiff
B P Keene for Defendant
Mr Mitchell for Creditor in support (leave to retire from hearing)

Judgment: 19 December 2001

RESERVED JUDGMENT OF FISHER J

SOLICITORS
Russell McVeagh (Auckland) for Plaintiff
Tetley-Jones Thom Sexton (Auckland) for Defendant

Introduction

[1] The plaintiff Harts seeks summary judgment against the defendant Mr Bryers for $1.9 million. Harts says Mr Bryers owes the money as guarantor of loans Harts made to four of his companies. The principal security for the loans were mortgages over a series of strata title apartments. Receivers for the four companies have already sold the apartments. The claim against Mr Bryers is for the shortfall. The question is whether for summary judgment purposes Harts can exclude a series of defences raised by Mr Bryers. The defences raise legal questions about the service of default notices under s 92 of the Property Law Act 1952, privity of contract, and the duties of mortgagees exercising their powers of sale.

Factual background

[2] Mr Bryers was a property developer who needed finance for a residential development in a central city building in Auckland. The building had seven levels, each of which was divided into two separate strata titles. Mr Bryers’ project involved the use of four companies of which he was director - Ace City Hostel Limited, Ace Accommodation Limited, Top Floor Limited, and Auckland City Apartments Limited. These four companies were to own six of the 14 strata titles. Two of the six strata titles controlled by Mr Bryers each had seven self-contained dwelling units. The other four were set up as communal residences for use by students and other low-rent tenants. The communal apartments each contained nine to 11 bedrooms with a communal lounge, a kitchen, and four to five bathrooms.

[3] The four strata title owning companies leased their properties to another of Mr Bryers’ companies, Auckland City Hotels Limited (“ACHL”), for a term of 10 years. Mr Bryers arranged for ACHL to sub-let the self-contained units and the bedrooms in the communal apartments. The day to day administration of the letting business was handled by another of his companies, Ace Hospitality Ltd.

[4] Harts (originally “Reeves Moses Hudig Mortgage Nominee Company Limited”) was a provider of financial services in the form of contributory mortgages. It worked with an associated company which it will be convenient to refer to as “Reeves Brokers” (originally Reeves Moses Hudig Mortgage Brokers Limited, now Harts Contributory Mortgages Limited). Reeves Brokers handled loan collections and mortgage administration on behalf of Harts in return for a fee paid by the borrowers.

[5] In 1998 Harts agreed to provide Mr Bryers’ companies with the finance required for his development project. The loans were secured by way of debentures and mortgages over the six strata titles involved. Mr Bryers signed guarantees in each case. There were also cross-guarantees between the mortgagor companies. Between 16 October 1998 and 23 November 1998 Harts entered into term loan contracts with each of the four mortgagor companies, Ace Accommodation Limited, Auckland City Apartments Limited, Ace City Hostel Limited, and Top Floor Limited. A further loan agreement of 22 April 1999 was entered into between Harts and Auckland City Apartments Limited. Pursuant to the five term loan contracts, loans were advanced to the four mortgagor companies totalling $2,536,000.

[6] Mr Bryers’ letting business was not a success. As a result AHCL could not pay the four mortgagor companies. They in turn began defaulting on the loan payments they owed Harts. On 20 December 1999 Harts served default notices under s 92(1) of the Property Law Act 1952 on each of the mortgagor companies. A further default notice relating to the second loan to Auckland City Apartments Limited was served on 28 January 2000. Contemporaneous notices under s 92(6) of the Property Law Act were served on Mr Bryers in his capacity as guarantor. On 22 July 2000 Harts served a written demand on Mr Bryers claiming payment of all overdue sums pursuant to his guarantees.

[7] Neither the four mortgagor companies nor Mr Bryers made payments towards the arrears. On 20 April 2000 Harts appointed receivers for the four mortgagor companies pursuant to its debentures. Upon investigating, the receivers found the building to be in disarray. The premises were in a state of disrepair. There were outstanding requisitions. Heavy arrears were owed to the body corporate, and in consequence to local authorities and utilities. There was no cash-flow to the four mortgagor companies. The receivers initially told tenants to pay their rent to the receivers but this caused confusion, given the complex lease and tenancy relationships involved.

[8] Harts sought advice from its receivers, who were principals in Ferrier Hodgson, Chartered Accountants, and from Barfoot and Thompson, real estate agents. The three discussed the strategy likely to result in the greatest monetary recovery. Barfoots advised that the current leases and tenancy arrangements should be terminated. In their view, this would allow time for repairs and viewing by potential purchasers and eliminate possible discounts due to uncertainties over the current tenancy arrangements.

[9] On 15 May 2000 the receivers distributed to all tenants a notice advising that the four mortgagor companies were in receivership, that those companies currently leased the premises to ACHL, that the receivers intended to determine the leases and re-enter the premises on 18 May 2000, and that as a result the individual tenants would need to vacate the premises by 5 p.m. on that date. On 18 May the receivers duly terminated the leases to ACHL and re-entered the premises. They then set about preparations to sell the properties involved. This included a marketing campaign leading to an auction.

[10] The auction took place on 19 July 2000. The highest bid was $1 million for the six strata titles as a block. Negotiations with the highest bidder resulted in a higher offer of $1.2 million with settlement in 10 days. By letter of 21 July 2000 Barfoots advised Harts that in their view the offer of $1.2 million was a fortunate one, that unless all units were sold in a single block there would be a residue of units that would be hard to sell, and that the offer of $1.2 million would be hard to match from any other buyers of similar financial substance. Harts accepted the recommendation, sold to that bidder, and in due course received the $1.2 million. They calculate that after allowance for the price received on sale, and all interest and costs, the outstanding debt was $1,918,923 as at 11 May 2001. On 1 September 2000 Harts brought summary judgment proceedings against Mr Bryers as guarantor.

Issues

[11] At a summary judgment stage the question is whether Harts can satisfy the Court that Mr Bryers has no defence. The usual affidavits in support were filed. They deposed to the foregoing facts and the belief of the mortgage lending manager, Mr Taylor, that Mr Bryers had no defence to the claims.

[12] Mr Bryers opposed summary judgment, citing no less than ten independent defences in his notice of opposition of 18 October 2000. Mr Keene, as fresh counsel for Mr Bryers, responsibly narrowed the grounds of opposition six days before the hearing. These were further reduced at the hearing when defences relating to excessive interest and non-allowance for the proceeds of sale were abandoned.

[13] In the result, it is submitted for Mr Bryers that three potential defences cannot be excluded at a summary judgment stage:

[a] A defect in one of the Property Law Act notices;

[b] Wrongful inclusion of collection fees; and

[c] Breach of plaintiff’s realisation duties as mortgagee.

(a) Defects in Property Law Act notices

[14] The first four notices under s 92 of the Property Law Act were issued to the four mortgagor companies on 20 December 1999. They were unexceptional. In each case they advised the mortgagor company that it was in default in paying identified interest instalments, collection commissions, mortgage administration fees and City Council rates. They warned that unless an identified figure were paid within a month (“on or before 21 January 2000”) Harts would have the right to exercise its power of sale and all monies secured by the mortgage would become due and payable. Copies of each notice were served on Mr Bryers on 22 December 1999.

[15] Two loans had been made to Auckland City Apartments Limited. When it came to the Property Law Act notice in respect of the second loan, Harts made a slip in one of the dates. Having specified the default in conventional terms it went on to state that the power of sale or entry into possession could be exercised “if you do not remedy the said defaults on or before 2 March 1999”. The notice was dated 27 January 2000 and was served on 28 January 2000. Allowing the usual month the intended date was, of course, 2 March 2000.

[16] Mr Keene submitted on behalf of Mr Bryers that reference to the wrong year in the notice of 27 January 2000 destroyed its validity, with the consequences that the principal sum owing under that mortgage had not yet fallen due for payment, that Harts had no right to sell that property when it did, and that since all the properties were sold as one block, this vitiated the whole sale process.

[17] Section 92 of the Property Law Act materially provides:

“Restriction on exercise by mortgagee of his rights

(1) Subject to the provisions of this section, no power to sell land or to enter into possession of land conferred by any mortgage shall become or be deemed to have become exercisable, and no money secured by any mortgage of land shall become or be deemed to have become payable, by reason of any default (whether made before or after the commencement of this Act) in the payment of any money so secured or in the performance or observance of any other covenant expressed or implied in the mortgage unless and until the mortgagee serves on the owner for the time being of the land subject to the mortgage a notice that complies with the requirements of this section, and (in any case where the default complained of is capable of remedy) the owner fails to remedy the default before the date specified in the notice.

(1A) Every notice shall be in the form prescribed by regulations made under this Act; but no notice shall be void by reason of any variation from the prescribed form unless the notice does not adequately inform the mortgagor of-

(a) The nature and extent of the default complained of; and

(b) The date (being a date that complies with the provisions of subsection (2) of this section) by which he is required to remedy the default (if it is capable of remedy); and

(c) The rights that the mortgagee will be entitled to exercise if the default is not remedied within the specified period,-

and the variation materially prejudices the interests of the mortgagor.

(2) The date to be specified in the notice as aforesaid shall not be earlier than 4 weeks from the service of the notice nor earlier than the date on which the power would have become exercisable or the money would have become payable if this section had not been passed. A notice under this section may be served before the last-mentioned date.

. . .

(6) If at any time the mortgagee exercises the power of sale conferred by any mortgage of land and the amount realised is less than the amount owing under the covenant to repay expressed or implied in the mortgage, no action to recover the amount of the deficiency or any part thereof shall be commenced by the mortgagee against any person (not being the owner of the land subject to the mortgage at the time of the exercise of the power of sale) unless the mortgagee, at least one month before the exercise of the power of sale, serves on that person notice of his intention to exercise the power of sale and to commence action against that person to recover the amount of the deficiency in the event of the amount realised being less than the amount owing under the covenant to repay.”

[18] The defence argument is that pursuant to s 92(1) the mortgagee must specify in the notice the date by which the default must be remedied; that this is reinforced by s 92(1A) and the form prescribed in Regulation 2 and the Schedule to the Property Law (Mortgagee’s Sales) Regulations 1983; that the date to be specified in the notice must be no earlier than four weeks from service pursuant to s 92(2); that the obligation under s 92(2) exists independently of the earlier subsections, but that in any event this notice was not saved by s 92(1A) because it did not adequately inform the mortgagor of the date by which it was required to remedy the default; and the defect materially prejudiced the mortgagor.

[19] The first challenge to that argument appears to be that any reader of the document receiving it on 28 January 2000 would have known that the date for remedying the default was 2 March 2000. In the end, what matters is the information conveyed to the reader. For this purpose, the document is to be read as a whole and with due regard to the factual matrix. The factual matrix is the set of circumstances which it can reasonably be assumed would have been in the contemplation of those who received the notice.

[20] The circumstances in this case were these. First, a document dated 27 January 2000 required the addressee to remedy defaults with the warning that “if you do not remedy the said defaults on or before 2 March 1999” certain consequences would follow. It would have been obvious to any reader that 2 March 1999 was not the date intended.

[21] Secondly, the same mortgagor and guarantor had just received another Property Law Act notice from the same mortgagee allowing the mortgagor just over four weeks within which to remedy the default. Allowing the same period in the present case indicated that the intended date was 2 March 2000.

[22] Thirdly, the guarantors - the associated companies and the managing director - received a notice of the same date, 27 January 2000, advising that Harts intended to exercise the power of sale contained in the mortgage in question “on a future date not earlier than one calendar month following the service of this notice on you”. A copy of the notice under s 92 served on Auckland City Apartments Limited was attached to the default notice served on the guarantors. The recipients must have known that the same period was involved.

[23] Fourthly, Mr Bryers, who was both guarantor and director of the mortgagor, deposed that he had had significant experience in property development. His experience included acting as project manager on a failed development at 43 Anzac Avenue which similarly ended in a mortgagee sale. He was scarcely unfamiliar with the four weeks notice requirements of s 92(2) of the Property Law Act.

[24] In my view, the combination of those circumstances was sufficient to convey to the addressees the clear message that the defaults had to be remedied on or before 2 March 2000. Characters typed on paper are not an end in themselves. They are no more than a medium of communication. The necessary information was conveyed by this notice. Having regard to implicit legislative intention, I would hold that the date was adequately “specified in the notice” for the purpose of s 92(2).

[25] In any event Harts could have resorted to the remedial effects of s 92(1A). Although that provision was introduced by way of an amendment in 1982, I see no reason why its ameliorating effects should not extend to the primary requirement under s 92(2). The Act is to be read as a whole. The prescribed form requires specification of a date by which the default is to be remedied. That date is to be ascertained by reference back to s 92(2), but s 92(1A)(b) expressly contemplates that variation from the prescribed form will be fatal to the validity of the notice only if certain conditions are satisfied. The variation will cause invalidity only if the notice does not adequately inform the mortgagor of the date, being a date that complies with s 92(2), by which he is required to remedy the default.

[26] If the requirements of s 92(2) were not subject to the remedial effects of s 92(1A) at all, there would have been no point in expressly providing a limit to the remedial consequences of s 92(1A) in circumstances where the mortgagor was not adequately informed of the requisite date. The inference, in my view, is that the converse applies, that is to say that where the notice does adequately inform the mortgagor of the date by which he is required to remedy the default, s 92(1A) saves the notice from invalidity.

[27] The effect of s 92(1A) is that the notice is invalidated only if, in addition to failing to adequately inform the mortgagor of the date by which the default must be remedied, the error materially prejudices the interests of the mortgagor. In the present case I think that the notice did adequately inform the mortgagor of the date by which it was required to remedy the default. That is the natural inference from the nature of the slip and all the surrounding circumstances discussed earlier. Nor was there any evidence or argument to suggest that the slip materially prejudiced the mortgagor. The natural inference is to the contrary.

[28] While Mr Keene presented this whole argument with skill and ingenuity, I would be sorry to see a party to litigation succeed on an unmeritorious technicality of this nature. The law is not an inward-looking game to be played for its own sake like Monopoly or Ludo. It is there to enable people to govern their relationships in the real world. No-one at any point has suggested that the slip made in preparing this piece of paper had the slightest impact on anyone.

(b) Collection fees not payable to plaintiff

[29] Each loan contract contained the following provision:

“The Borrower shall pay a collection commission and mortgage administration fee as directed by the Lender and in the absence of any direction to Reeves Moses Hudig Mortgage Brokers Limited as follows:

(a) On each interest date an amount equivalent to one month’s interest on the principal sum calculated at the rate of 1.9 per centum per annum; and

(b) on repayment of the principal sum an amount equivalent to interest on the principal sum calculated on a daily basis at the rate of 1.9 per centum per annum from the last preceding interest date to the date on which interest ceases in accordance with the terms of this loan.”

[30] In each loan agreement “Lender” was defined as Reeves Moses Hudig Mortgage Nominee Company Limited, that is to say the plaintiff in the current proceedings which I have been referring to as “Harts”. The point made on behalf of Mr Bryers is that pursuant to clause 12 the borrower was required to pay the collection commission and mortgage administration fee “as directed by the lender and in the absence of any direction to” the company I have been referring to as “Reeves Brokers”. The argument is that Harts is unable to enforce a promise for which the intended beneficiary was not Harts but Reeves Brokers.

[31] It is common ground that Harts did not expressly give the mortgagor companies any relevant directions in terms of clause 12, at least in the usual sense. Total collection fees amounted to $39,406. Mr Keene submitted that there was no evidence to show that that sum was payable to Harts, nor that it represented any loss to Harts. He submitted the principle to be that Harts could claim only for its own loss and that any damages it recovered had to be recovered on its own account, not on behalf of Reeves Brokers. He pointed out that in reliance upon Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 501-502, the authors of Burrows, Finn and Todd Law of Contract in New Zealand (8th edition) state at paragraph 14.2.4, p 480:

“A’s loss would be the value of his disappointed expectations, which may be, but need not be, quantified as the amount B had promised to pay C. The damages are held by A for his own use, not for C.”

[32] Clause 12 of the loan contract is not a simple promise to pay a third party. It is a promise to make payment as directed by the other contracting party. The provision for payment to Reeves Brokers is no more than a default provision. It is invoked only in the absence of a direction from the other contracting party, Harts. In my view a promise to effect payment at the promisee’s direction is different in kind from a promise to make payment to a stated third party. In the former case the real beneficiary of the promise is the promisee, since the power to dictate the destination of the funds must include the power to dictate that the payment be made to the promisee itself or to one of the promisee’s creditors. Nor is there any time limit within which any such direction might be given. Inferentially, if no such direction is given within a reasonable time, the promisor would be fully protected if it made payment to the third party, Reeves Brokers. But in the absence of any such payment, it seems to me that pursuant to clause 12 the lender/promisee has retained the power to give a direction as to the destination of the funds.

[33] In the present case the very fact that Harts has issued proceedings seeking payment of the collection commission to itself is an unequivocal direction that the payment be made to Harts. On that analysis, the whole question of privity of contract falls away.

[34] Even if that had not been so, the law has probably moved on since the discussion referred to in Burrows, Finn quoted earlier. It seems that in this situation the promisee can probably recover substantial, and not merely nominal, damages where there has been non-performance of an obligation owed to a third party. The contracting party is then accountable for the damages to the third party: see Alfred McAlpine Construction Limited v Panatown Limited [2000] 3 WLR 946, substantially supported by Jackson v Horizon Holidays Limited [1975] 3 All ER 92.

However, the point was not fully argued before me and I do not need to finally determine it.

[35] I conclude that in these proceedings Harts is entitled to recover the collection commission and mortgage administration fees payable pursuant to clause 12 of the loan contracts.

(c) Breach of plaintiffs realisation duties as mortgagee

[36] The defence allege a breach of s 103A of the Property Law Act 1952 and of allied duties in equity, both of which impose upon a mortgagee the duty to obtain the best price reasonably obtainable when exercising a power of sale. The principal criticism in this case concerns Harts’ decision to sell with vacant possession. Other criticisms are that there was an inadequate marketing period and that Harts ultimately sold below valuation. As Mr Keene submitted, the question at this stage is whether there is an arguable defence or cross-claim which so affects the plaintiff’s claim that it would be unjust to enter summary judgment.

[37] The preliminary question is whether Harts owed a relevant duty to Mr Bryers as guarantor. Mr Keene relied principally upon s 103A of the Property Law Act which provides:

“Duty of mortgagee exercising power of sale

A mortgagee who exercises a power of sale of land or other mortgaged property, including exercise of a power of sale through the Registrar of the High Court under section 99 of this Act, owes a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable as at the time of sale.”

[38] Section 2 defines “mortgagor” for the purposes of the Property Law Act:

“Mortgagor includes any person from time to time deriving title under the original mortgagor, or entitled to redeem a mortgage, according to his estate, interest, or right in the mortgaged property.”

A guarantor does not fall within that definition. In consequence, s 103A does not apply: McCreanor Estate Nominees Limited v Trustees Executors and Agency Company of New Zealand Limited (Wellington Registry, CP 150/99, 8 July 1999, per Wild J).

[39] In other circumstances that would not have mattered, given that a mortgagee has similar obligations towards a guarantor at equity and, depending upon the terms, in contract: China and South Sea Bank Limited v Tan Soon Gin [1990] 1 AC 536 at 545G(PC); Knight and Another v Lawrence [1993] BCLC 215 at 223.

[40] The difficulty for Mr Bryers, however, is that he has expressly contracted out of the obligations that Harts would otherwise have had. Clause 3.1(i) of the guarantees provide:

“LIABILITY OF GUARANTOR NOT AFFECTED

3.1 The Liability of the Guarantor hereunder notwithstanding anything contained in this deed shall not be abrogated prejudiced or affected by any of the following:

. . .

(i) Any claim that the Lender has not fully realised all securities held by it in respect of the monies hereby secured and/or the obligations hereby secured or has not realised any of such securities in a manner so as to maximise the realisable value thereof.”

[41] It is, of course, open to the parties to a contract of guarantee to formulate the legal relationship between them in any manner they think fit. Clear words in a guarantee can operate to exclude rights that a guarantor would otherwise have had at common law or equity: Pogoni v R & W Symington & Co (NZ) Ltd [1991] 1 NZLR 82 (CA). By clause 3.1(a), Mr Bryers expressly waived such rights as he might otherwise have had with respect to failure to maximise the realisable value of the security.

[42] I do not see anything in the rest of the guarantee justifying any different approach. If anything, clause 12.1, pursuant to which the guarantor abandons in favour of the lender any right to set up any cross-claim or right of set-off until all obligations of the guarantor have been fully paid, tends to reinforce it. It is true that in clause 1.1 the guarantor has guaranteed only “all monies which are now or may hereafter from time to time be owing by the borrower to the lender”. However, in the face of the explicit language in clause 3.1(i) and clause 12.1, I do not think that there is any room to import the notion that for the purposes of clause 1.1 the sum guaranteed is only the net amount after deducting a set-off or counterclaim arising from breach of realisation duties. My conclusion is that it is not open to Mr Bryers to set up by way of defence, set-off or counterclaim, any alleged breach of realisation duties.

Principles governing realisation duties

[43] Even if Mr Bryers had not contractually waived the opportunity for a claim under this head I would not have upheld the complaint that Harts failed to secure an optimum price when it sold the apartments. The duties of a mortgagee exercising its power of sale have been helpfully discussed by M J Ross in “A Company Receiver’s Obligations” [1985] NZLG 44, in the analogous context of receiverships. I would summarise the principles for the purpose of this case as follows:

[a] The overriding requirement is to take reasonable care to obtain the best price reasonably obtainable: Cuckmere Brick Co Ltd & Another v Mutual Finance Ltd [1971] 1 Ch 949 (CA).

[b] The mortgagee has the power to decide, purely in the interests of the mortgagee, if and when to sell (ibid; Downsview Nominees Ltd v First City Corporation Ltd [1993] 1 NZLR 513). Consequently, it is only the best price reasonably obtainable at the time of sale that matters.

[c] Where the security is substantial, or specialised property is involved, it will usually be necessary for the mortgagee to obtain and act upon specialised advice as to the method of sale: TSE Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 (PC). Appointing a competent agent to sell does not discharge the mortgagee’s duties, but since its duty is ultimately only one of reasonable care, putting the matter in the hands of a competent agent will usually go a long way towards discharging the mortgagee’s duties.

[d] In the normal course the proposed sale will need to be advertised with an adequate description of the property’s attributes and, within reason, widely enough to attract all possible purchasers. In some cases this will need to extend to both general and specialist publications: see Kwong supra at p 61; Ansell v NZI Finance Ltd (unreported, Wellington Registry, A434/83, Quilliam J, 14 May 1984).

[e] There is no obligation to postpone the sale in the hope of a better price later, or to break up the assets and sell in a piecemeal manner if this can only be carried out over a substantial period or at a risk of loss: Kwong supra at p 59.

[f] When assets are sold by tender or auction, a reasonable period must usually be allowed for purchasers to inspect the property and arrange finance before submitting bids: see Fairer Fishing Co Ltd v Broadlands Finance Ltd (unreported, Timaru Registry, A35/77, 17 August 1984); discussed by Ross, supra, along with Ansell v NZI Finance Ltd.

[g] Those are simply detailed examples of the way in which the duty to take reasonable care to obtain the best price reasonably obtainable might be discharged in particular cases. In the end, the mortgagee’s performance can only be assessed by reference to each particular case.

[h] The fact that a mortgagee has acted in good faith does not mean that it has necessarily discharged its equitable duty to take reasonable care to obtain the best price reasonably obtainable: Moritzson Properties Ltd v McLachlan [2001] 9 NZLC 262, 2448 at 2662,457 to 262,458, paras 59 and 10.

[i] On the other hand, in evaluating judgments made by or on behalf of the mortgagee it should not be forgotten that in the absence of bad faith, the mortgagee shares with the mortgagor and guarantor an incentive to maximise the price obtained. It is not lightly to be assumed that the mortgagee has acted in a way that was contrary to its own interests as well as the interests of others.

Application of realisation principles in this case

[44] The principal criticism advanced by and on behalf of Mr Bryers was that Harts was wrong to sell the properties with vacant possession. By way of background, Mr Bryers pointed to the initial confusion when the receivers notified occupants that they were to pay rental monies direct to them when the rent entitlement of the four mortgagor companies was merely to rent from ACHL. The arrangement ACHL had in place was for the rent to be collected by its associated company, Ace Hospitality Limited. More importantly, Mr Bryers contended that the properties would have been more attractive to buyers if marketed as tenanted rather than empty. In support, an experienced former bank manager pointed to the general desirability of maintaining tenancies during realisation of properties so as to maintain the value of the property and maintain a cashflow to set off against the costs.

[45] I have no doubt that, all else being equal, it will usually be preferable to sell large investment properties with existing leases and tenancies in place. What the argument overlooks in the present case is that the tenancy venture had failed. There was much uncontradicted evidence that the tenants were young, transient, of limited means, irregular payers, and short-term - as short as one night in some cases; that despite requests Mr Bryers was unable to produce documentation of the tenancies; that the rooms were rundown, badly maintained, and in some cases badly damaged; that there were major arrears owing to the body corporate; that there were outstanding health, fire and safety requisitions; that there were problems in access to the lift room; that the emergency lighting system was beyond repair, as was the lighting for the basement and lower stairwell; that due to non-payment of body corporate levies of $46,000, large bills were owing to Vector and MetroWater; that due to non-payment to MetroWater the building was on reduced water pressure with no water above the first floor; that the power was about to be cut off due to non-payment of Vector’s bill; and that the business had not been able to generate enough income to permit Ace Hospitality Limited and ACHL to maintain rent payments to the mortgagor companies.

[46] In the first instance, those were the problems of ACHL and Ace Hospitality Limited rather than the four mortgagor companies. However, ACHL was a demonstrably unsatisfactory lessee. The mortgagor companies had no other source of income. Had Harts elected not to terminate the lease, purchasers of the properties would have been buying them subject to an unsatisfactory lessee, ACHL, which had no obvious prospects of paying the rent. Assuming all disputed evidence in favour of Mr Bryers, there remains no real answer to the fact that vacant possession was needed to allow remedial work to be carried out, to allow inspection by prospective buyers, and to allow a fresh start by those buyers. In addition, from 21 July 2000 Harts was justifiably relying upon unequivocal advice from Barfoots that the property should be sold with vacant possession.

[47] The second criticism was that the marketing period was too short. In their report of 15 March 2000 Barfoots had originally proposed a marketing period of three months. Then in their report of 29 May 2000 they recommended a shorter marketing campaign of three and a half weeks in view of the strong interest they already had by that point. Their uncontradicted evidence is that the marketing campaign lasted for about five weeks. The auction was not held until 19 July 2000. There is no credible evidence that the marketing period detrimentally affected the price obtained. In addition, Harts was justifiably acting on the advice of its experts.

[48] The third criticism was that Harts ultimately sold at an under-value. The property was sold on 1 August 2000 for $1.2 million. Much higher valuations had been obtained at earlier periods, particularly for financing purposes. But, of course, they presupposed viable leases and tenancies. The ultimate valuation from registered valuers, Seagar & Partners, indicated a forced sale value of between $1.3 and $1.4 million as one parcel. Even that was based upon a number of assumptions - that final code compliance certificates would be issued and that estimated cashflows from room rentals would be equivalent to similar buildings - which could not be supported on the facts.

[49] Regardless of valuations altogether, the ultimate test was the auction. Valuations lose most of their significance once there has been a properly advertised auction. In this case, following a marketing period which was adequate in length and nature, the highest bid was only $1 million. Harts were acting on expert advice when they ultimately accepted the offer of $1.2 million. They cannot be criticised for that.

[50] My conclusion is that there is no arguable defence, set-off or cross-claim arising from the allegations that the mortgagee breached its realisation duties - quite apart from the contractual bar which prevented defence reliance upon that allegation.

Quantum

[51] Mr Long set out figures as to quantum in his memorandum of 11 May 2001. These were not contested in Mr Keene’s memorandum in response. I therefore adopt the total of $1,918,923 as at 11 May 2001. To that figure there will be added the daily penalty rates recorded in the schedule to Mr Long’s memorandum.

Costs

[52] Clause 15 of the guarantee provides for Mr Bryers to pay on a solicitor-client basis all costs incurred by Harts in enforcing the guarantee. Solicitor-client costs to 10 May 2001 amounted to $67,951. The defence seeks taxation of these fees on the basis that Mr Bryers is a person to whom the fees are to be charged under the Law Practitioners Act 1982.

[53] I accept Mr Long’s submission that in reviewing the costs charged by the plaintiff’s solicitors the Court is exercising its own jurisdiction to enforce a contractual obligation except where contrary to public policy: ANZ Banking Group (NZ) Ltd v Gibson [1986] 1 NZLR 556, 566 (CA). In exercising that jurisdiction the Court can review the costs for reasonableness (National Bank v Murland [1991] 3 NZLR 86, 100). This includes the ancillary power to direct that any dispute as to quantum be referred to the Registrar for taxation under R54: Criton v Bank of New Zealand (Auckland Registry, AP128/00, 12 February 2001, Chambers J). I would only add that given the time and cost to the parties, taxations are to be avoided if possible.

[54] I have had no submissions as to the reasonableness of the costs in the present case beyond the submission in Mr Keene’s memorandum of 16 May 2001 that the $67,951 claimed by Harts “is somewhat over double the plaintiff’s actual costs for the same work”. In his memorandum in response Mr Long has interpreted this, no doubt rightly, as the submission that Harts’ claimed costs are more than double the total costs charged to Mr Bryers.

[55] In the prayer for relief the statement of claim sought solicitor-client costs in principle but did not specify the sum sought. So far as I am aware, the documentation specifying actual costs claimed was not produced until after the hearing. In the circumstances, I should not try to review the costs for reasonableness. All I can say on that subject is that given the scattergun way in which Mr Bryers chose to conduct his opposition to summary judgment, it is not surprising that the costs included by the plaintiff are high. What is clear is that Harts is entitled to solicitor-client costs in principle and subject only to an assessment of reasonableness yet to be carried out.

Result

[56] There will be judgment for the plaintiff in the sum of $1,918,923, together with penalty interest at the daily rates specified in the memorandum of counsel for the plaintiff of 11 May 2001 down to the date of this judgment. There will also be a declaration that the plaintiff is entitled to solicitor-client costs, subject to any review for reasonableness. Leave is reserved to the plaintiff to apply to a Master for summary judgment as to the quantum of legal costs. It will be for the Master to decide upon the most efficient method of resolving quantum of legal costs after hearing from the parties.

[57] Given the contractual basis for costs, I make no conventional award of costs on a party and party basis.