Chateau Constructions v Zepinic [2010] NSWSC 265

Chateau a builder, is in dispute with the Zepinics, the owners of residential property. The building contract contains the equitable charge to secure the obligations Zepinic owed to Chateau. The charging clause contains a protective mechanism whereby the charge only arises in respect of moneys payable under the building contract “to the extent a court or tribunal has made an order that the owner pays the money to the builder”. Interestingly there seems to have been no consideration as to whether, arising only upon default, the charge was a penalty. 

The Court noted Chateau had obtained an order from the CTTT that the Zepinics pay Chateau the identified judgment sum of $370,847.35 plus interest. The Zepinics had not paid this sum in the course of these proceedings,  before the CTTT and of the proceedings in the District Court all gave good grounds for the Court to infer that unless Chateau has access to the remedy of judicial sale the Zepinics are unlikely to satisfy the outstanding CTTT judgment. The builder sought the remedy of an equitable chargee of judicial sale of the property. The judge noted that upon default an equitable chargee is entitled as of right to an order for sale: citing Sood v Christianos [2008] NSW SC 1087.

Discretionary considerations
Chateau did not press for an immediate sale but proposed a delay to allow for redemption. Chateau conceded that the likely market value of the property, the fact that but for the charge the property is otherwise unencumbered and the amount of the defendants’ likely equity in the property following discharge, all prompt the conclusion that immediate sale is not required. The Court agreed noting:

Even at the most pessimistic end of the range of experts’ opinion, there is ample equity in the property to satisfy the value of the charge. Circumstances do not require rapid sale in order to preserve the value of the charge in the face of diminishing equity in the property.

The Zepinics complained that they did not receive a proper itemised bill of costs from solicitors on behalf of Chateau. The judge noted that:

“Their existence or creation is relevant to whether or not a stay of orders for judicial sale would be granted. An itemised bill will have to be prepared for an assessment of costs to take place. The Zepinics should be put in the position where they know exactly what is the full extent of Chateau’s final claim for costs. This is particularly so where Chateau claims entitlement to deduct all its costs, the subject of assessed costs orders, from the proceeds of the Turramurra property after judicial sale.

His Honour noted that the Zepinic do not appear to accept that judicially ordered sale of the property should be taking place at all. A sufficient period should be allowed to permit them to reconcile themselves to the reality that the sale will take place if they do not meet their judgment obligations and to permit them a full opportunity to take whatever commercial steps they choose to raise finance to pay out their existing obligations to Chateau. However His Honour then noted that too long a period may itself be counter-productive.

Ultimately His Honour made the order for sale but stayed its operation for a period to allow Chateau to complete the assessment of its costs with liberty to apply.

Appointment of a trustee for sale and conduct of the sale
His Honour noted that the principles that govern the mechanics of an order to judicial sale are clear. The Court must decide whether the sale should be “in court” by a trustee appointed by the court or “out-of-court” by one of the parties; there is no general rule that conduct of the sale will be given to the mortgagor on a sale out of court; where the mortgagor has the best interests of getting the highest price and appears to be a responsible person then, subject to the court fixing a reserve and the proceeds of sale being paid into Court, conduct of the sale may be given to the mortgagor out of Court.

Despite this the Court appointed a liquidator nominated by Chateau to conduct the sale. This was on the basis that if the sale process was placed in the hands of either party it would likely be that the sale process will be paralysed by further disputes between the parties. The history of the dispute between the parties compeled this conclusion.

Possible purchase by the Chargee
Chateau sought leave to bid at any public auction that results from orders for judicial sale of the property. The Zepinics resisted this course. His Honour gave leave holding:

It is well established that a mortgagee and a chargee cannot sell property under a power of sale to itself. Where a sale is made by the Court and the mortgagee has obtained leave to bid the mortgagee may then purchase. Allowing Chateau to bid at the auction will assist in maximising the sale price obtained.

The reserve price
Chateau asked the Court to set the reserve price for the proposed public auction. Chateau did not seek to have the Court delegate the power to set the reserve price to the appointed trustee for sale. The Court ordered that the trustee obtain a valuation of the property from a registered valuer and upon receiving the valuer’s report apply to the Court for the setting of a reserve price.

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