Perdacher v Papua New Guinea Banking Corporation [1997] PGNC 170; N1637 (10 October 1997)

N1637

PAPUA NEW GUINEA
[In the National Court of Justice]

WS 404 OF 1995

WALTER PERDACHER
-Plaintiff-

-V-

PAPUA NEW GUINEA BANKING CORPORATION
-Defendant-

Waigani Doherty, J.
1997: July 1, 2, 3, 9, 30 & 31
August 13, October 10

DECISION

Civil - obligations of mortgage in possession of property - contractual and statutory obligations of the mortgagor.

The defendant went into possession of the plaintiff’s property which had been mortgaged to them. The property had been let prior to possession in August 1992. In January 1995 the defendant gave notice that the property needed repair. The plaintiff was under a contractual and statutory duty to repair when notified to do so. He inspected in February 1995. Neither party did repairs nor was it tenanted thereafter. It deteriorated and was sold in September 1996. The plaintiff sued for loss of income and devaluation of the building.

Held:

(1) A mortgagee in possession is obliged to take the same care of a property as the mortgagor himself would and account for what he receives and what he would have received if the land was managed properly. Failure to do so is wilful default.

(2) A mortgagee in possession is obliged to endeavour to find a tenant but is only obliged to use normal practice to find a tenant.

(3) A mortgagee in possession is obliged to do necessary repairs to maintain the property to the standard it was in when he took possession but he is not obliged to take it out of his interest. He is entitled to take his interest first.

(4) A mortgagee exercising his power of sale is not a trustee of the power of sale for the mortgagor. He has a right to realise the sale when he likes and is not obliged to wait for a better time of sale or a bigger auction attendance but he has a duty to take reasonable care to obtain what is the true market value.

(5) A mortgagee who occupies property is obliged to pay a fee commensurate with usual rent.

Mr Wright, for the Plaintiff
Mr Lightfoot, for the Defendant

10 October 1997

The plaintiff sued the defendant bank on a writ of summons filed on 24 May 1995 claiming the defendant, whilst mortgagee in possession of the property he owned as a tenant in common, at Lot 7, Section 62, Granville was in breach of its duties as mortgagee in possession and, as a result of that breach, he suffered damage. In their defence the defendants stated that the property was the subject to fair wear and tear, the elements and inappropriate design and it was the Plaintiff’s own responsibility to maintain the property.

It was not in dispute that the Plaintiff was a tenant in common with Peter Hans Boenig in equal shares. This was pleaded and although the reference was made to Mr Boenig in course of the evidence, he was not a party and no issue on this or the Plaintiff’s status and entitlements was taken until submission. Likewise it was not in dispute that the defendant had a mortgage over the property and that they were mortgagee in possession at least during part of the relevant time. What is strongly contested is how they carried out their duties as mortgagee in possession and if it amounted to wilful default; the Plaintiff had undertaken part of the obligations of the maintenance of the property himself, his legal and contractual duties to maintain the property and the factual reasons for its deterioration. There was both evidence and submission in law on the legal obligations of both parties.

In his particulars of claim the plaintiff states the defendant failed to inspect the property properly or at all, failed to report, failed to effect repairs or reasonable improvements, failed to manage it and/or was negligent.

The defendant denied any breach of duty and stated the loss was due solely to the plaintiff’s neglect. It relied, inter alia, on the terms of the mortgage, the covenants implied by S.64 Land Registration Act Ch. 191 and an agreement between the two parties dated 11 March 1995 (this was in fact dated 14 May 1994). Both sides called several witnesses and expert witnesses, both made written submissions filed on 12 and 13 August 1997.

It was apparent from opening remarks of Counsel and evidence that this was one of a series in an on-going disputes between the plaintiff and the defendant bank. There was a reference to previous court cases, the defendant, in course of the hearing sought to file a cross claim. After argument this was refused and the matter proceeded on the original pleadings.

The property at Lot 7, Section 62, Granville (to quote from schedule A of the reply filed on the 13 December 1995 ) is situated in an exclusive residential area of "Touaguba Hill" on a steep slope, had a very large building and two self contained flats, a bed-sitting room, patio areas, one with a pergola in-ground swimming pool. It was "staggered on five levels with balconies on various levels." It was constructed of concrete and blockwork on the lower levels and timber on the upper levels, the roof was sheet metal. The interior finishes and the state they were in 1994/95 was the subject of considerable evidence.

The plaintiff pleads that the defendant took possession of the premises in April 1993 though in evidence he said it was August 1992, on the vacation of its tenant, the Russian Ambassador. The defendant denied this but said it entered a tenancy agreement on 1 June 1993 with the Fijian Ambassador. Prior to August 1992 a monthly rent of K7,200.00 was paid by the Russian Ambassador for the premises. That rent had been used to repay a loan advanced by the defendant to the plaintiff. The plaintiff gave evidence and was cross examined at length. He called several witnesses.

The house was built by him - or to his specification in the early 1980’s for himself, his tenant in common and their company. In 1984 it was mortgaged to the defendant bank and the plaintiff resided in Mt Hagen because of his other business commitments. It was leased to tenants through an agent who liaised directly with the tenants, deducted costs of maintenance and paid the balance to the bank. Until the August 1992 the tenant was the Russian Ambassador.

The plaintiff and the witness Mr Nicholls, who was the agent and who looked after the house, both stated the house was "kept in good order". The plaintiff’s evidence was that the materials used to build the house originally were of good quality, many were imported and of industrial standard and were custom built for the house. He insisted that he maintained the house and the out buildings shampooing carpets, repainting, repapering, replacing flywire constantly and "refurbish(ing) constantly".

The plaintiff called Mr Peter Nicholls who had acted as the agent for the house from 1989 until the Bank took control of it. He described the house, the former tenants (who he said were "not many people"). He did not have a lot of demands for maintenance by the tenants but he had supplied new furniture to a "high quality" on the request of the Russian Ambassador. He visited the house whilst the Ambassador was there, he considered that they left the house in "very good condition" and were "very proper in their dealings" albeit they were demanding whilst occupants. He presented correspondence at the time the Russian Ambassador vacated. This showed maintenance that had been carried out in July and August 1992. It included repairs to taps, sinks and other works, repainting and repairs to the pergola. There are bills for each month with several items on each account. Mr Nicholls’ evidence was that the house was always well looked after and the requirements of the Russian Ambassador were fulfilled with alacrity.

After the vacation he relinquished all control of the house to the Bank. The plaintiff was unsure when the keys were given to the Bank, he thought it was in August 1992 (despite his pleading) he was equivocal on the dates. Mr Nicholls recalled tagging all internal keys and giving the keys at the bank’s request, he could not recall who exactly he gave them to, but thought it was the office of the receiver, a firm of accountants and was after the Russian Ambassador left in August 1992.

The defendant’s witnesses had no direct knowledge of the state of the house in August 1992. It would appear that the manager at that time, Mr Dooley, is no longer available to give evidence. He was referred to frequently in the course of the hearing. There is no evidence on file of a status report on the house in August 1992.

I find that prior to August 1992 the house was mortgaged to the defendant but taken care of by Mr Nicholls on behalf of the plaintiff. I find that it was maintained to a high standard and all minor repairs requested by the tenant were carried out. I find that when the Russian Ambassador vacated the house was in a good state of repair. In making these findings I do not lose sight of the fact that the house was several years old and may have been subject to the elements.

After the vacation by the Russian Embassy there is no clear evidence what happened to the house until it was occupied by the Fijian Ambassador in 1993. The plaintiff was not aware of the date of their entry into or departure from the property. Neither he nor Mr Nicholls had any direct dealings with the Fijian Ambassador. They did not inspect the building, the plaintiff was sent bills for repairs from time to time and says he paid those promptly. He reconfirmed this in cross examination noting that the last payment he was asked to make was in August 1994. In later evidence a tenancy agreement dated 9th June 1993 between the Fijian Ambassador and the bank was tendered. It states the tenancy commenced on 1 June 1993. Further correspondence shows the Ambassador vacated on 30 September 1994.

In the 1st week of January 1995 the plaintiff met with Bank officials and was given a document drawn up by a bank official for work that was required on the property. His first reaction on reading this document was that it was too expensive for minor works so he requested a friend to look at the property on his behalf and as a result of that visit he was told to come to Port Moresby from Mt Hagen and inspect for himself. He described the condition he found the house in detail. He said the white carpet had blood stains going from 3rd floor to the basement, the doors were off the hinges, louvre doors were broken, the main bedroom bed was demolished, the bed head ripped off the wall, the carpet was dirty and blood stained, dining chairs were broken, the dining table made of solid kwila was damaged, there were signs of water damage on the ceiling, the kitchen which he had paid US$25,000.00 for, had a burnt out stove, a broken sink, a fridge that was dirty and could not be used and with ants nest 11/2 metres high, the windows did not open, the sliding windows did not work. The lower basement was blocked with water which had been there for months. Balcony rails were broken. He considered that the house was "like a pigs sty". "It was a disgrace." Externally the swimming pool was full of mosquitoes and algae, the pergola was overgrown or broken, the concrete drive was broken up and split. He considered that the house had the general appearance of one that was not cared for.

Various matters were put to him in cross examination but he insisted that basins were broken, furniture was smashed, the ants had eaten away parts of the kitchen cupboards and were in a state indicative of long term abuse. He used the word "chopped" and "completely demolished" to describe the kitchen and would not resile from these descriptions, he would not concede that they were only knife marks and that the stains that he said were on the carpets may have been wine. He insisted they were blood.

The plaintiff in his evidence said that the state of the property clearly indicated the defendant had failed to inspect it whilst they were mortgagee in possession and whilst their tenant was an occupation. He insisted that they should have done so at least once a month and if they had inspected the property they would have seen the damage particularly the white ant infestation.

As a result of his visit he wrote to the then manager of the defendant bank, Mr Dooley, on the 15 February 1995 stating he was "appalled at its current condition" stating his views that the bank did not look after the property and that it was "the bank’s clear responsibility" to look after it. He agreed he had not made payments on his agreement and undertook to make instalments until January. He said this was due to the delay in a coffee shipment. He asked Mr Dooley that the defendant bank be "fair" and "to come to a settlement on the property". There after nothing had been done to the house to repair it. He said he was not informed at all of the white ants infestation or any other defects prior to his meeting in January, being shown the list and his subsequent inspection.

On the 6 May 1996 he received a notice of demand from the defendant demanding K3,770.059.01 with daily interest of K1,678.45 accruing. A notice of default demanding payment of the mortgage for the same amount was attached.

The plaintiff insisted in his evidence in chief and in cross examination, if he had been aware of the need of repair to the house during the time of the Fijian Ambassador’s occupation he would have done those repairs. He had paid for all the repairs when bills were rendered by the bank and whilst Mr Nicholls was in control. This is not been rebutted by the bank’s own evidence and evidence indicates that payments for accounts were made and the building was maintained during Mr Nicholls occupation. The plaintiff insisted that the property should have been inspected when the Fijian lease ended, given its condition it could not have been inspected and any damage should have been taken out on the deposit paid. The plaintiff arranged for an expert witness to look at, inspect and report on the property. The witness Mr Richardson, an architect, did an inspection and made a report.

Mr Richardson gave evidence of his inspection of the property in May 1995. He produced a long and detailed report together with photographs and the defects which he identified. These were admitted as evidence without objection and he was cross examined on the possibilities and reasons for the state in which the building was found.

He spoke more dispassionately of the condition that he found the building in but noted that its condition was due to "an accumulation of defects". He identified these as both a general type of defect coupled with abuse. Among the defects he specifically referred to where damage to the kitchen, a broken stove, a canopy over the bar that required physical force to damage, severe staining on the carpet, severe abuse to the timber dining table, removal of a bed head which he considered would require considerable force, damage to exterior and interior walls, doors of cupboards which were destroyed and which would have required considerable force to bring off their hinges, signs of water penetration through the roof and walls in parts of the building. Other water penetration marks show that water had been sitting and possibly permeated from box gutters which had rusted or which had been allowed to have "vegetable matter" accumulate and remain.

He categorised the defects in the building as neglect, accident or physical damage, materials, design or construction defects, lack of maintenance and deterioration due to wear and tear. Although his report (Exhibit 13) spoke of accident or physical damage he made it clear in his oral evidence that much of the physical damage he attributed to abuse would require force. It was put to him that it could have been by accident but he replied that the number of accidents it would require to cause such damage "made him wonder" and considered that part of the condition was due to improper use and clear signs of abuse. He mentioned that certain parts of the building were "in a pretty filthy condition". He also considered that some of the defects were due to the materials used in the building e.g. the marble chips which were coming loose, where, in his opinion due to defective bonding material. Rust to the pergola and to parts of the balconies could have been due to local conditions as the building was southeast facing and subject to salt laden winds and guba winds from the west. He conceded that the heavy salt laden winds were corrosive and would lead to water retention especially in between boards and fascia.

Notwithstanding his clear reservations that parts of the building defects were due to construction, materials, wear and tear (for example in the wall papers) and age he made it clear that much of the condition of the house was due to abuse and failure to properly maintain it. He made it clear in his evidence that if the building was not maintained it would deteriorate more rapidly. He estimated the price to put it in its "proper condition" would be K150,000 and up to K250,000 to put it in a near original condition. He did agree that a lesser amount would have been sufficient to do some general maintenance and repairs and bring it into a habitable condition. He estimated that amount at K50,000. Despite strenuous cross examination he would not concede that the condition of the house was purely due to accident, wear and tear, poor construction and the elements.

He gave details and produced photographs showing the white ant infestation. He was unable to be specific on how long the ants had been in the property or how long they would have been likely to be there before their presence became obvious. It is clear from his evidence that they eat cellulose and rapidly consume cellulose and wooden material before turning to more solid timber "if they are hungry". He conceded a full inspection under the foundations would have been necessary to determine where the tunnels went to. He did go under the foundations and crawled in under parts of the building but did not have enough light to fully determine the extent of the infestation.

He noted the state of the carpet indicated heavy traffic and staining. Like the plaintiff he considered that a 100% wool carpet could have lasted for up 30 years if properly looked after.

It is clear from his evidence that some of the defects to the state of the house were a combination of design, the elements and time but also to the abuse, neglect and failure to maintain.

The plaintiff also called expert evidence of an estate agent Mr Needham who had attended the auction when the property was sold by the defendant bank. He had been to the auction for another client and had walked round it with his client. He considered that it was untidy, needed a clean, he would not go as far as saying it was run down. If it had been rented at the time of the auction he considered the rent would be in the region of K5,200 - K6,300 per month but said demand in 1992-93 would account for a higher rent at that time. His opinion of the likely fetching price for the property when it was sold at auction would have been in the region of K450,000 - K500,000 if it had been in a better and tidier condition. Despite various comparisons and conjectures put in cross examination he did not resile from his earlier opinions.

The defendant called three of its staff members, 2 of the loans managers and current property manager were with the defendant during the time plaintiff had his loan and Mr Wenham the then property manager who had not been there throughout. The former manager Mr Dooley and others referred to in evidence were not available. Mr Mamia gave evidence of the meeting that was held between the plaintiff, the then manager (Dooley), Wenham the property manager on the 12 January 1995. His recollection was that the list of defects and estimated cost drawn up by Mr Wenham was given to the plaintiff and "his immediate reaction was that the estimate cost was too high he would like to do the job himself" and "he thought he would get the job done at a much lower cost". The plaintiff also discussed the arrears on his loan and said he would "see about getting appropriate persons to do work on the property" when he returned from overseas in two weeks time.

After the meeting the witness made a record of minutes of the meeting. In cross examination it transpired that those were not a contemporaneous record of the minutes, he had not been personally involved in the management of the property and his only involvement was in recording and maintaining reports and supervising the loan. For example he was unaware of the previous tenancy or the history of the building prior to the occupation by the Fijian Embassy but he was aware that the Fijian Embassy vacated at the end of September or early October 1994 and prior to that the rent was received by the bank. I am satisfied on his evidence and that of the plaintiff that there was discussion with the plaintiff on (1) who would find a tenant and (2) who would do repairs. However no formal record was sent to plaintiff setting out these minutes and the plaintiff’s recollection of the meeting and the decisions therein does not accord completely with Mr Mamia’s and the plaintiff is particularly vague on who was to find tenants. He said he would "look into repairs" but could not recall if he was actually to arrange the repairs and could not recall if he was to look for tenants. I find this vagueness on the part of the plaintiff unusual.

It is clear that when the meeting ended on the 12 January 1995 no formal resolution was recorded and entered or mutual agreement reached on who would find a tenant and who would do the repairs. Whilst the defendants have recorded the minute showing the plaintiff is to arrange a tenant and the repairs that was not formal, put in writing to him and no-one seems to know where the keys of the building were in January 1995. All indications are that they were still with the defendant and the Plaintiff got them from the bank to inspect the property later.

The other witness from the defendant was Mr Mambai who in October 1994 was property officer of the company and had a general duty to attend to properties, leases and check properties as required. He was aware of the lease by the Fijians and arranged inspection of the building by the "Port Moresby branch" after they left. There is no clear evidence that the building was inspected whilst the Fijian’s were occupying it, there is a reference to the loans manager visiting but no inspection reports or minutes. The documents presented to the Court show that the Fijian Ambassador vacated the premises in September 1994. His letter of the 7 September 1994 speaks of burglaries, people throwing rocks and other forms of harassment. However he goes onto to say that the house is in good order, all of the furniture is in place, and the Embassy had undertaken cleaning and repairs and replacements to a value of K6,500.00 part of which was reimbursed by the defendant bank.

I particularly note that he records cleaning of carpets and repairs to doors and showers prior to departure. Mr Mambai did not visit the property immediately after the Fijian Embassy left. He did not visit it until the 24 November 1994. He was hesitant but thought there were others who may have inspected it immediately afterwards and on one occasion before. There is no clear evidence of a report, minutes or entries formally recording the state of the property and the finalisation of the lease when the Fijian Embassy departed.

Mr Mambai and Mr Wenham together inspected the building on the 24 November 1994. It was clearly in a bad condition in parts. He particularly notes that the kitchen was damaged, cupboard doors were not in position, white ants had eaten the timber and doors were off their hooks, part of the floor in one bedroom was spongy. There were termite mounds in the cupboards, a termite nest fell on the floor near the fridge a sink was damaged, the swimming pool was dirty, full of mud and had frogs inside. A fascia board was damaged, the bed head was ripped off. However he did not see any damage to the bench tops in the kitchen from the axe or knife marks, the carpet was "not that dirty" he could see no water damage, the garden was tidy and not overgrown and the general cleanliness of the house was fair, he checked the water tanks and taps all of which were working and made a report and an inventory, the action required on the house and sought quotations for work to be done.

At the time of his inspection the house was been occupied by a bank employee for security. It is never been clear when exactly this employee took occupation, it was about 3 weeks after the Fijians left or if the premises were inspected prior to his occupation or when he vacated. A firm or state agents had been contacted to look for new tenants. There is no indication that any communication as to the state of the property was made known to the plaintiff. He was informed by letter of the 11 October 1994 that he had to pay over K3,000.00 for repairs and that the tenant had vacated on the 30 September and he had to meet repayments whilst no rent was being paid. He was not told of the state of the property. It is quite clear that no indication was given to the plaintiff that the house was in need of repair. The Fijian ambassador’s entire bond was returned to him when he left.

The defendant bank wrote to a large number of corporations and embassies on the 1 December 1994 advising of the availability of the property for rent. As a result of that, two perspective tenants showed an interest but it is clear from the evidence before the Court that they required the house to be put in a better condition than it was.

Although the bank arranged for quotes for some repairs the only work done was by a company to clean the pool and general cleaning. An internal bank minute was written in mid December directing no money be spent on the premises.

Mr Wenham, who had accompanied Mr Mambai on the inspection, also gave evidence. He was clearly not a member of the defendant’s staff when the plaintiff’s agent was taking care of the property nor whilst the Fijian Embassy in occupation. He thought it may have been inspected during the Fijian occupation but presented no documents to confirm this and I find from Mr Mambai’s evidence that it may have been inspected once by another employee but there is no report as to its condition.

Mr Wenham had no direct knowledge of when the Fijian Embasssy vacated or what happened to the repairs but he was informed by another officer of the bank on the 15 December 1994 that the repairs and works to the house were to be "placed on hold" and it is apparent that no other maintenance work was done after the cleaning despite the interest by two people in leasing the property if it was brought up to an acceptable standard.

I am satisfied on the evidence or Wenham and Mambai that no further action was taken to repair the property, there was no inspection done, the keys were given to a Mr Smedley at a date unknown and returned on a date unknown. Clearly no one was very sure where the keys were in the period December 1994, January, February 1995.

Mr Wenham drew up the estimate of cost of repairs etc, amounting to K102,500.00. He based his estimate on his personal experience of looking after property. He confirmed the conditions given in evidence by Mr Mambai e.g. the broken sink and that the property department of the bank had not undertaken any repairs or maintenance after the vacation of the property by the Fijian Embassy. This included lack of remedial action to treat the white ant infestation although it was obvious to both the bank witnesses when they saw it. The list of necessary repairs and costs were made known to the plaintiff. The plaintiff did not inspect the property until a month after.

I make the following findings of fact:;- up to the date that the defendant bank took control of the building in August 1992 the house had been well maintained and regular repairs and maintenance were done to it. Examples are to be seen on the annexures to Mr Nicholls final letter.

- The defendant had the keys from August 1992 and entered into possession from that time.

- The bank took control of the building and let it to the Fijian Embassy for a period of 14 months, it was vacated at the end of September 1994.

- No regular inspections were done whilst the Fijian Embassy was in occupation. The Fijian Embassy experienced security problems.

- Repairs valued between K3,000 and K3,500 were undertaken in the 14 months period. These were paid for by the plaintiff.

- No proper inspection was carried out at the end of the Fijian Embassy’s lease. The defendant bank relied on their Moresby office who stated it was in a very tidy state and the Fijian’s own letter describing what they had done.

- I find that there was deterioration in the building during the period that the Fijian Embassy occupied it.

- The plaintiff was never informed of the exact state of the building at the end of Fijian occupation, he was merely asked to pay the repairs and told that they had vacated. The defendant bank put an employee in the premises about three weeks after it was vacated for security purposes.

- The bank did a thorough inspection on the 24 November 1994, two months after the Fijian tenants left.

- The building was in a bad state of repair at that point with obvious damage to it and definite signs of white ants infestation.

- The defendant bank did not take remedial immediate action to tackle the white ant infestation.

- The defendant gave no notice to the Plaintiff of the state of the building after the inspection of 24/11/94.

- The bank made a conscious decision not to spend money on repairs in mid December 1994.

- The defendant bank took active steps to seek tenants on the 1 December 1994.

- Two people were interested in occupying the building provided it was in proper condition, no action was taken to bring it into the state of repair required by the prospective tenants.

- There was a meeting with the plaintiff in which he was given a detailed break-down of cost of repairs estimated to be a K102,500.00 on 12th January 1995.

- He did not accept that estimate.

- He inspected the building in February 1995 and found it in a very bad state of repair with further deterioration not obvious on the 24 November 1994.

- No clear agreement was made between the parties as to who was going to do the repairs and find a tenant. The plaintiff had the white ant infestation treated.

- The property remained empty and continued to deteriorate, the deterioration escalating from lack of maintenance and repair.

- No other notification other than a letter re the outstanding interest occurred between the parties until the Default Notice.

The defendant auctioned the property in September 1996. Before doing so it was inspected by Mr Wenham and Mr Dunnage, the estate agent and auctioneer. Mr Dunnage recommended certain cleaning etc. to put it in a better state before viewing by prospective purchasers. That work was undertaken by S&K Cleaners at an estimated cost of over K2,000.00. The property sold for K360,000.00. Mr Dunnage’s evidence was that even if it had been repaired the costs of the repairs etc. would not be offset by the amount that would be gained in the price. This appears to be in line with the evidence of the plaintiff’s expert witness, Mr Needham and I accept it as fact.

The mortgage entered into by the plaintiff and the defendant provided at Cl. 5 that the Plaintiff "maintain and protect the mortgaged premises and keep the same in a good and tenantable state of repair and in good working order and condition and will on being required by the Bank so to do forthwith amend every defect in a repair and condition thereof..."

The mortgage was also subject to the provisions of the Land Registration Act Ch. 191 at S.64 which obliged the plaintiff "(1) that he will keep the principle money and interest secured by the mortgage at the rate and time specified in the mortgage without deduction; and (2) that he will repair and keep in repair all buildings or other improvements erected and made on the land..."

On the 11 May 1994, before the defendant went into possession of the building, the plaintiff and the defendant entered into an agreement for settlement relating to the total debt owed to the bank and this provided, inter alia, that any rent received from the property would be paid to the defendant bank and "No such rental payments received by PNGBC will be made available for maintenance or repair of the Granville property. Such outgoings shall be the responsibility of Perdacher at all times. Failure of Perdacher to maintain or repair the Granville property as required on adequate notice to Perdacher of any defects in the property constitutes a breach of this agreement."

1. Mortgagee’s Duty to Find a Tenant and Maintain

It is clear that the duty to maintain was on the Plaintiff and there is no contractual or statutory obligation on the mortgagee to repair. There is no direct precedent in our jurisdiction on a mortgagee in possession’s duties to repair and maintain or find a tenant. Counsel for the defendant says in submission that the covenant implied by S.64 Land Registration Act Ch. 191 -

"does not include a power for the mortgagee to repair at the expense of the mortgagor, in default of the mortgagor, in default of the mortgagor’s so doing. In the absence of an express covenant or condition containing such power, the only ways in which the mortgagee may compel repairs to be effected in the event of a breach by the mortgagor of the implied covenant to repair would be:

(a) to enter into possession, in which event the mortgagee will become bound to effect such necessary repairs as the rents will provide for, after payment of his interest."

Counsel for the plaintiff says the mortgagee has an obligation to repair the premises and is entitled to improve them provided he does not burden them with debt. He relies on Fisher and Lightwood’s Law of Mortgagee.

Both Counsel cite authority that a mortgagee is obliged to take the same care of the property as the mortgagor himself would (Wragg -v- Denham [1836] EngR 752; [1936] 160 E.R. 335) and he is obliged to account for not only what is received from the land but what could have been received if the land was managed with due diligence.

Halsbury 4th Ed. Vol 32 para 698 states -

A mortgagee who goes into possession of the mortgaged property, and thereby excludes the mortgagor from control of it, is bound to account to the mortgagor, not only for the rents and profits which he actually receives, but also for the rents and profits which, but for his wilful default or neglect, he might have received; that is, for everything which he has received, or might or ought to have received, while he continued in possession

and I consider that is the law which applies to the mortgage entered into by the parties before me.

The mortgagee is also obliged to ensure the property rents are recovered Halsbury Vol 32 para 700 states –

700. Amount charged when property let or unlet. Where the mortgaged property is let at the time of the mortgagee taking possession, he is charged with the rents at the rate reserved, if he could with due diligence have recovered them. A mortgagee must use the usual means to recover the rents if they are likely to prove effectual, but he is not bound to distrain on goods of a stranger which may be on the demised premises. When the property is not let, he must use due diligence to let it, and, if it remains unlet through his default, he is charged with the rents which ought to have been obtained. It has been said that the rent obtained will be deemed to be the same the whole time of possession, unless the mortgagee shows to the contrary. The burden of proving wilful default is, in the first instance, on the person charging it, but if he shows that the premises were capable of being let and were left vacant the burden is shifted, and the mortgagee must prove that no tenant could be obtained.

I consider the defendant was obliged to endeavour find a tenant. They knew full well their own interest payment was dependant on tenancy but the obligation was to use normal accepted practice to find a tenant. It did not extent to going to extraordinary lengths. I consider there is no evidence of any such endeavour from August 1992 to June 1993 but there was from 30 September 1994 up to 31 December 1995.

I consider on the facts before me that the defendant failed to exercise its duty to find a tenant from the period they went into possession until the Fijian Ambassador’s occupation and I consider this amounts to wilful default. As I said their obligation is normal everyday steps to find a tenant. There is no evidence they did this or explanation for the failure.

I order damages against the defendant for the period from August 1992 to June 1993 when the defendant was in wilful default by failing to try to find a tenant. The period is 10 months. The evidence is that rent of K7,200 was what was the norm for the building at that time, (it was to be lower in the future because that type of building became less popular). I allow some period to find a tenant, and allow damages for 7 months. I note the cost of deductions during Mr Nicholls agency for maintenance from wear and tear, agents fees and such costs and notionally deduct these and award the plaintiff K5,500 per month being K38,500 for this part of the claim.

There was a further period from the time the Fijian Ambassador vacated at the end of September 1994 until the defendant took active steps to look for a tenant on 1 December 1994. They may have been successful if they had taken steps of informing the Plaintiff of the work required. They did not until January. I consider that was wilful neglect amounting to breach of their duty as mortgagee in possession. Taking account of the lesser amounts achievable for rent at that time and the matters referred to above I award damages of K10,000 for this period.

The degree of a mortgagee in possession’s duty to maintain and the duty of care has not been ruled on in our jurisdiction and this has been dealt with in very thorough and detailed submission by both Counsel and I am grateful for that assistance.

As stated I have no doubt that after August 1992 the defendant was mortgagee in possession. As noted in Noyes v. Pollock [1882] C.A. –

"The fact that mortgagees are in receipt of the rents and profits of the mortgaged estate does not necessarily make them chargeable as mortgagees in possession. The question whether they are mortgagees in possession depends upon whether they have taken out of the mortgagor’s hands the power and duty of managing the estate and dealing with the tenants."

I consider this a relevant precedent, applicable in the case before me and of relevance and application in our jurisdiction and adopt it.

Mr Lightfoot for the defendant says that -

The potential liability of a mortgagee in possession has two aspects. First, a mortgagee will not be permitted by equity to gain any personal advantage as a result of taking possession beyond that to which it was entitled under the mortgage. A mortgagee is liable to account for any further advantage.

Secondly, equity requires that a mortgagee account not only for what is received from the land, but also for what could have been received had the land been managed with due diligence.

and the mortgagor must inform the mortgagee if he considers the land is underlet or not properly managed. Failure to do so could raise an estoppel. He relies on Waltans Stores (Interstate) Ltd -v- Maker [1988] 62 A.L.J.R. 110. I agree the mortgagor has a duty; he cannot wash his hands of responsibility for his property but that duty must not amount to interference with the mortgagee. Mr Lightfoot submits plaintiff had enough business contacts in Port Moresby "to be appraised of the management of the property during the period the Bank was in possession". I do not accept that. The bank had a duty, by their own deed of settlement to inform the Plaintiff and a duty as mortgagee in possession. I do not consider there was any duty on the plaintiff to send people around to check on the tenants the bank put in and to report on the bank’s activities.

Both Counsel refer to the mortgagee in possession’s duty to repair and maintain. Mr Lightfoot referring to a duty to do necessary repairs relying on Sandon -v- Hooper [1843] 6 Bear 246 and other precedents. Mr Wright saying the mortgagee is obliged to take the same care of the property as the mortgagor himself would relying on Wragg -v- Denham [1836] EngR 752; [1836] 160 E.R. 335 at 337 and has an obligation to repair the premises but not burden it with debt out of proportion to the amount borrowed.

I consider there is a duty on the mortgagee in possession to do necessary repairs to maintain a property to the standard it was in when he took possession. He is not obliged to take this out of his interest and is entitled to take his interest first. He is entitled to take it out of the balance of rents and if this is not sufficient to charge it to the mortgagor. The mortgagee who fails to do repairs sufficient to maintain the property in the state it was when he went into possession is in breach of his duty as a mortgagee particularly when he fails to check or check properly and he becomes aware that property is in a poor state of repair. To fail to take action by repairing or giving the mortgagor notice to repair amounts to wilful default on the part of the mortgagee. Whilst I consider that is the applicable law on the facts before me I note that the agreement of 11 May 1994 obliged the plaintiff to repair and that contractual obligation was an express one over-riding any covenant or duty implied by law. It was worded "Failure of Perdacher to maintain and repair the Granville property as required on adequate notice to Perdacher of any defects in the property constitutes a breach." Hence the contractual obligation was on the defendant to notify and it was known to both parties that the plaintiff was not in Port Moresby. He was dependant on the defendant informing him of the need of repairs. I consider his obligation to repair, only could be fulfilled when the defendants notified him and the failure of defendant so to do between 30 September 1994 and 12 January 1995 was negligent and breach of the agreement between them. After January 1995 the Plaintiff had both actual notice from the bank by way of Mr Wenham’s list and actual and constructive notice by way of his own inspection. There is no evidence that either did anything to repair or maintain, other then white ant treatment by the Plaintiff from January 1995.

I consider the defendant had a duty to ensure the Plaintiff was given notice to maintain and repair the building and when they failed to do that then the duty on them was to ensure the building did not fall into a state of disrepair. In fact after October 1994 they had no rent to use to pay for repairs but I have found that the deterioration partly occurred during the Fijian occupation plus the defendant failed to inspect or notify the plaintiff to maintain.

I find the defendants failure to inspect, maintain while the Fijian Ambassador were in occupation or notify the plaintiff during and after the departure of the Fijian Ambassador amounts to wilful neglect. I find the defendant continued in that wilful neglect in the months October to December 1994 by failing to inspect and ensure maintenance. This failure led to escalation in deterioration and an appreciable depreciation in the value of building.

I note the various costs given by Mr Richardson for the costs in bringing the house to a proper condition these range from K50,000 to fix it up, to K150,000 to bring it to a proper condition and K250,000. I also note both estate agents estimated it would have achieved between K140,000 - K150,000 more on sale if in a good state of repair. I note the difference in condition from Mr Wenham’s inspection in November 1994, the plaintiff’s in February 1995 and Mr Richardson’s in May 1995. I find the deterioration escalated after December and on the basis of the figures given assess depreciation on the value until the date the plaintiff was given notice as K50.000. The plaintiff would have been legally obliged to repair taking the percentage spent by Mr Nicholls I deduct 20%, K10,000 from this amount and award damages of K40,000 on this head.

2. Duty on Sale

The mortgagees standard duty in exercising a power of sale was considered in Cuckmere Brick Co. Ltd & Another -v- Mutual Finance Ltd [1971] EWCA Civ 9; [1971] 2 All ER 633 where the English Court of Appeal reviewed the history of precedents on the mortgagee’s duty to take reasonable care to obtain a price equal to market value.

In reviewing the law it was said - at p.643 -

It is well settled that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes. Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding exceptionally low. Providing none of those adverse factors is due to any fault of the mortgagee, he can do as he likes.

And

There are some dicta which suggest that unless a mortgagee acts in bad faith he is safe. His only obligation to the mortgagor is not to cheat him. There are other dicta which suggest that, in addition to the duty of acting in good faith, the mortgagee is under a duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment he chooses to sell it: compare, for example Kennedy -v- de Trafford with Timlin -v- Luce. The proposition that the mortgagee owes both duties, in my judgment, represents the true view of the law.

And

Indeed it had long been so regarded by the courts. see Wolff -v- Vanderzee and National Bank of Australasia -v- United Hand-in-Hand and Band of Hope Co, in which the Privy Council expressed the clear view that a mortgagee is chargeable with the full value of the mortgaged property sold if, from want of due care and diligence, it has been sold at an undervalue. It would see, therefore, that many years before the modern development of the law of negligence, the courts of equity had laid down a doctrine in relation to mortgages which is entirely consonant with the general principles later evolved by the common law.

The Court noted at p.646 that a mortgagee exercising a power of sale is in an ambiguous position, he is not a trustee as the power he has is for his own benefit to enable him to obtain repayment of his loan but he still had a duty to conduct the realization as a reasonable man would behave in realizing his own property so a mortgagor may receive credit for the fair value. I consider this is applicable to this case and in our jurisdiction.

I accept Mr Dunnage’s evidence which I consider accords with that of Mr Needham that the property would have fetched more at auction if in a good state repair; possible K450,000 - K500,000. The defendant Bank did some cosmetic cleaning as recommended, major work would have outweighed the profit but the price fetched reflected its state. Whilst the defendant did what was appropriate on the advice at time that not over-ride the duty to ensure repairs were made and the lower the price was due to the state the house had been allowed to deteriorate to. But the contractual duty to repair was on the plaintiff and after January 1995 he did nothing (other than the white ant treatment) to bring it up to a suitable state of repair for either tenants or for sale. He did not fulfil that contractual obligation of which he had notice. The bank had a duty to maintain also and did nothing and did not give the defendant notice to do so. I find both parties were at fault during that period, the plaintiff in breach of his contractual duty and the defendant his duty as mortgagee in possession.

I consider for that period loss must lie where it falls and make no award against or for either party. I accept that there was an earlier deterioration before January 1995 which contributed to the lower sale price but consider such loss has been accounted for in the damages for the failure to maintain already awarded.

The defendant had an employee occupy for security. There is an implication the building may have deteriorated while he was there. The duty on occupation is to pay a fee commensurate with usual rental but I consider he was not really occupying it for his own use but as security and for that reason I do not order an occupation fee.

The status and rights of the tenant in common has been canvassed in submission. It is clear obligations on the debt mortgaged were the plaintiffs and set off against the plaintiff’s accounts. I consider the Court cannot rule on either the tenant-in-common’s rights or liabilities whilst he is not a party and it would be contrary to S.37(11) Constitution to do so. I consider any obligations are between the plaintiff and his tenant in common.

Lawyer for Plaintiff: BLAKE DAWSON WALDRON LAWYERS
Lawyer for Defendant: CARTER NEWELL LAWYERS