Who is responsible when external cladding fails in an apartment tower during a fire - Court of appeal?

Further to my post about the fall out from the Lacrosse Tower fire in VCAT (see:  https://melbournepropertylaw.blogspot.com/2020/01/who-is-responsible-when-external.html), the Court of Appeal recently handed down its decision on the appeal from VCAT. 

In Tanah Merah Vic Pty Ltd v Owners' Corporation No 1 of PS631436T [2021] VSCA 72, Beach, Osborn JJA and Stynes AJA upheld most of the decision of Judge Woodward, sitting as a Vice President of VCAT. 

The Court of Appeal has undertaken a very detailed analysis about the factual matrix and the obligations undertaken by each of the parties to the litigation. In a joint judgment, Beach and Osborn JA and Stynes AJA also set out a detailed summary of the findings made by Judge Woodward in VCAT. 

The Court of Appeal's decision upholds the Tribunal's finding that the builder, LU Simon, breached warranties implied into the Design & Construct Contract by sections 8(b), (c) and (f) of the Domestic Building Contracts Act, 1995. The Court of Appeal also upheld the Tribunal's finding that each of the builder's consultants (the fire engineer, the architect and the building surveyor) and the tenant who started the fire failed to exercise reasonable care and that these failures were a cause of loss to LU Simon. 

However, the Court allowed one ground of appeal by the building surveyor, Gardner Group P/L. 

The proportions of liability found by VCAT to apply were 33% to the building surveyor; 39% to the fire engineer; 25% to the architect; and 3% to the tenant. 

In a costs judgment on 7 June 2021, the Court of Appeal noted that in its view the apportionment of responsibility in the case should be:

Gardner Group (building surveyor): 30 per cent; 

Ellenberg Fraser (architect): 25 per cent; 

Thomas Nicholas (fire engineer): 42 per cent; and 

Mr Gubitta (tenant): 3 per cent.

In other words, the fire engineer's responsibility was increased by 3% and the building surveyor's responsibility was decreased by that amount. 

Combustible Aluminium Composite Panelling (ACP) is installed in many buildings across Australia, and promises to be a difficult area for building owners, owners corporations, builders and their consultants (building surveyors, architects and fire engineers) for many years to come. 

The City of Melbourne Building Surveyors have been very active in issuing Building Notices and Building Orders in respect of various high rise residential buildings with ACP's following on from 2 apartment fires in the Melbourne CBD and Docklands. 

Further, the Victorian State Government has also been actively involved in trying to clean up the issue. 

The upshot of the Court of Appeal's decision is that builders and their advisors who have used or recommended ACP's that are non compliant with the requirements of the Building Act 1993 and the Building Code of Australia will most likely be found to be responsible for the cost of removing and replacing those panels. That liability will arise when claims are made against a builder pursuant to statutory warranties concerning the suitability of materials, compliance with the law and fitness for purpose arising under Domestic Building Contracts Act 1995 subsections 8(b), (c) and (f).

WG Stark 

Hayden Starke Chambers

Are there any recent cases about a mortgagee's duty of good faith in selling secured property in pandemic times?

The Supreme Court of Queensland (Holmes CJ) has recently considered the duty of a mortgagee in selling a secured property in uncertain economic times (ie during a pandemic). 

In HSBC Bank Australia Ltd v Wang & Ors [2021] QSC 58, the Court considered an application to remove a caveat lodged by the registered proprietors of a property on Hope Island on the Gold Coast in Queensland. 

The caveator/registered proprietors had bought the property in 2009 for $9 million with loan funds ($4.5 million) obtained from the mortgagee, which were secured by a registered first mortgage. The mortgage went into default, and the lender obtained default judgment for possession of the property, and took possession by warrant on 1 December 2019. 

The lender sold the property for $5,510,000 after advertising it for sale at a time when Queensland's international and state borders were closed, with settlement due 18 December 2020.

The caveator/registered proprietors lodged the caveat after the sale, and just before settlement on 17 December 2020. 

The caveat claimed that the registered mortgagee had sold the property in breach of the mortgagee's duty to act in good faith towards them, because the mortgagee had sold in a pandemic, had sold too rapidly, had not waited until the property market improved and sold at a significant undervalue.  

The mortgagee had obtained a valuation of the property in January 2020 in the range of $5,500,000 to $7,200,000. The valuer noted that the property was bought in 2009 at the peak of the market, and that it had been poorly maintained since then. He recommended an extended sales and promotion period of 6 to 12 months, noting that a shortened time frame and forced sale conditions would significantly reduce the potential sale price. 

In July 2020, a further valuation was obtained, noting the significant deterioration in the market at that time (due to the pandemic), and the resulting reduced market value of the property. 

An auction took place in early August 2020; the reserve price was $6,750,000. The highest bid at the auction was $4,500,000 and it was passed in. 

Eventually, the property was sold a little over a month after the auction for $5,510,000. This price was accepted as it was the best offer received, and it was significantly higher than the highest bid at the auction, despite a significant marketing campaign. The property had not received much interest and had a good deal of negative feedback about its current state. Further, there was uncertainty about the economy in general and the prestige property market in Queensland in particular. 

The registered proprietors obtained expert valuation evidence that challenged the lender's valuation, noting in his opinion that the land was valued at around $6 million when it was sold, and the improvements at the property increased the value to over $10 million. 

The Court then proceeded to analyse a mortgagee's duty of good faith to its borrowers, and noted that Griffiths CJ in the High Court in Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676 described the duty of good faith as meaning that the mortgagee must not: 

    ...recklessly or wilfully sacrifice the interests of the             mortgagor.

Recklessness would be demonstrated by a mortgagee who failed to take:

    ...obvious precautions to ensure a fair price and was careless as to whether one was obtained (at CLR 680).

In this case, the borrowers alleged that was exactly what happened in the circumstances. 

The lender on the other hand argued that merely because valuation evidence indicated a higher market value did not establish that there was a serious question to be tried as to a breach of the duty of good faith. 

The borrower's complaint was essentially that the marketing period was truncated because the applicant accepted the second respondents’ offer within weeks of the auction. The judge concluded (at paragraph 27) that there was not an arguable case that, in doing so, the lender breached its duty of good faith.

The Court concluded that this case was an instance in which, given the extensive advertising and marketing of the property prior to the auction, the sale price which the mortgagee was able to achieve was a better guide to market value than the valuation evidence.

The Court also noted that a sale at an inadequate price does not demonstrate a lack of good faith. It is necessary to show that the mortgagee’s failure to take reasonable steps to obtain a proper price was so serious as to be characterised as unconscionable conduct.

The mortgagee had accepted the offer of $5,510,000 in a context in which its own valuer had valued the property prior to the auction (at the lower end) at $5,000,000.

The court pointed out that a mortgagee is “...entitled to sell at the time of his choice and without waiting for a time which a selling owner might consider more propitious” And, indeed, there was no reason to suppose that a more propitious time was pending.

The judge found that the lender sold at a time when, with international borders closed and state borders being closed to different regions at different times, there was no reason to suppose that any improvement in the market was imminent.

It seemed that at the time of the sale, buyer sentiment was becoming more unfavourable. 

The judge concluded at paragraph 33 that in the context of the mortgagee’s efforts to sell and the uncertainty of conditions, neither the low price achieved nor the failure to wait can conceivably justify an inference that the applicant acted other than in good faith, and there was nothing to support the contention that the lender was not acting in a genuine belief that accepting the offer was in the best interests of all concerned, including the borrowers.

The Supreme Court of Queensland also concluded that the balance of convenience tipped against allowing the caveat to remain in place. The borrowers did not want to retain the property; instead they urged its sale. 

Further, they did not pay into court the arrears owing on the mortgage so as to provide the lender with certainty of recovery. It seemed probable that the mortgagee would, if it had to re-sell at the time of the hearing, achieve at least a price which would meet the amount secured, but there was some risk that it would encounter difficulty finding another buyer within any reasonable time frame. 

Whilst the caveators gave the usual undertaking as to damages, they were in China at the time of the hearing (not Australia) and there was no evidence at all as to their means of meeting such an undertaking. 

Indeed, the Court found that it would seem to follow that if they had means available in this country they would have taken steps to negotiate some arrangement with the lender concerning the arrears of the debt so as to prevent the property’s sale; but nothing of the sort occurred.

The purchasers had taken various steps towards moving from their home in Sydney to the property, and enrolled their son in a school, which he then attended, in its vicinity. 

One of the purchasers remained in Sydney with possessions still packed and waiting to be transported, while the other purchaser and their son were living in temporary accommodation at the Gold Coast. They remained ready and willing to complete the contract. 

The Court accepted that the purchasers faced considerable inconvenience should their purchase not proceed.

Conclusions 

First, a low sales price will not of itself demonstrate a lack of good faith. The mortgagee's conduct must be so unreasonable as to rise to the level of unconscionable conduct.

Secondly, in light of the uncertainty and significant market disruption in 2020 as a result of the pandemic, the price offered and accepted for the property was better evidence of the property's market value than the valuations obtained by the respective parties.

It seems in these difficult economic times that we are likely to see more actions by lenders in taking possession of, and selling security properties. 

Whilst borrowers are unlikely to be satisfied about the results of a mortgagee's auction, it seems that it will be very difficult for a borrower to establish a lack of good faith where the only issue is the low sale price achieved by the lender. 

WG Stark

Hayden Starke Chambers