Quzag v Gunning Shire Council [2005] NSWSC 970

This case concerned the sale of land by council for unpaid rates and whether a duty of care was owed by the council to the landowner. The owner claimed that the council sold the property for less than market value so he suffered loss and damage which entitled him to compensation.

The council had placed notices in the Government Gazette, the local newspaper, and written to the owner at three different addresses advising of their intention to sell the property. The property was advertised in 4 newspapers, over the radio and brochures had been printed. The agent noted there had been a high level of interest in the property and when it went to auction it achieved the higher end of the scale the agent had estimated that it would.

The owner sued for breach of statutory duty and in negligence. The judge rejected that there was a statutory cause of action open to the owner because the sale had complied with the relevant provisions of the Local Government Act. The court found the property had been properly advertised, the advertisements met the minimum standard required by the Act, and a convenient, if not ideal, location had been chosen for the auction in accordance with the Local Government Act. The court rejected the argument the council was negligent because they found the reserve price was appropriate for the property and that the council acted reasonably in relying on the advice of a “competent and professional” agent who had experience selling similar local properties.

The court noted that is no common law duty in negligence which makes a mortgagee liable in common law damages if they fail to recover a “good price” for the property sold under their power of sale. The mortgagee is only subject to an equitable duty to obtain a “fair price” and the court held that the same applies to councils selling properties in these circumstances.

The situation in NSW has changed since this decision. On 14 May 2009 the Real Property and Conveyancing Legislation Amendment Act 2009 (NSW) was passed which inserted a new section 111(A)(1) into the Conveyancing Act which reads:

A mortgagee in exercising a power of sale in respect of mortgaged land, must take reasonable care to ensure that the land is sold for:
• if the land has an ascertainable market value when it is sold – not less than its market value, or
• in any other case – the best price that may reasonably be obtained in the circumstances.

This brings the law in relation to the sale of land owned by an individual into line with the law in relation to the sale of land owned by a corporation. This is governed by section 420A (1) of the Corporations Act, which reads:

In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
• if, when it is sold, it has a market value—not less than that market value; or
• otherwise—the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

The previous common law duty was a duty to act in good faith. This meant that so long as the lender was not fraudulently selling the property to a friend for a knock down price, or behaving with reckless indifference, then the fact that the property was sold at less than market value was irrelevant. Under the new individual regime, presumably the jurisprudence that has applied under the corporation regime will apply. In that regard Whelan J in Irani v St George Bank Ltd (No 2) [2005] VSC 403 at [142] set out at [142] set out the following principles:

It first is necessary for the court to determine whether the property in question has a “market value”. If it does, (a) applies. If it does not, (b) applies.
The question of whether a property has a “market value” depends upon the degree of certainty with which value is ascertainable by reference to events in a market. A property does not have a “market value” where market experience does not yield a value with sufficient certainty to be used as an integer.
Both limbs of s 420A are concerned with the process of exercise of the power of sale. On the one hand, breach of the duty provided for is not established merely because market value or the best price reasonably obtainable is not achieved. On the other hand, breach may be found to have occurred even where it is established that market value or the best price reasonably obtainable was achieved.

The final paragraph is at odds with the literal wording of the legislation. As worded it imports a strict liability on the lender to get the market value or the best price available. Whelen J’s formulation seems to suggest that what is important is the steps that were taken.

This in turn amounts to an analysis of the lender’s bona fides and that is a reversion to the common law good faith test. Thus Whelen J is shying away from the strict liability of the legislation. Do the judges follow him? In a June 2009 case where Bransgroves acted for the lender Winters v H G & R Nominees [2009] NSWSC 467 Bryson J noted:

It is essential to the borrowers’ case to establish that there was a serious discrepancy between the market value of the property at the time it was sold and the sale price. Unless there was a serious discrepancy, criticisms of the lender’s conduct cannot affect the outcome.

This seems to show a deference for the literal construction of strict liability (although adding the qualified of serious where none exists in the legislation). However, later His Honour seemed to back away from this. Although it might be that he only meant to address the subsisting common law duty of good faith:

This document shows careful consideration and review of factors relevant to a decision to sell and to the price, going through the information and advice available and supporting the decision to recommend it with careful reasoning. This rebuts any view that the defendant acted with any extraneous or improper motive, or with indifference or lack of appropriate attention to the business in hand and its importance.

The distinction is probably irrelevant to lenders. The main lesson applies either way, more professionalism is required in order to cover the lender’s position. It is not good enough to sell in a casual manner. There must be a paper trail which demonstrates the steps taken, for example valuations before setting reserve prices etc. Care should be taken to address any anomalous valuations or claims as to value at the time rather than later in court. Write every letter, email and memo as though it will one day be read by a judge because it will be discoverable.

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