IN THE SUPREME COURT OF SAMOA
HELD AT APIA

BETWEEN

A & J WULF ENTERPRISES LIMITED
a duly incorporated company having its head office at Apia
Plaintiff

AND

THE NATIONAL PROVIDENT FUND
a body corporate created under the National Provident Fund Act 1972
Defendant

Counsels: Mr Enari for plaintiff
Mr F P Meredith for defendant

Hearing: 16/2/06, 23/2/06, 3/3/06
Judgment: 23/2/07

JUDGMENT OF VAAI J

On the 16th July 1998 the plaintiff, a private family company of Mr & Mrs Wulf, borrowed $800,000 from the defendant to buy a ¼ acre section at Tufuiopa and to construct a shop complex thereon. The loan was secured by a mortgage over the same property as well as mortgages over properties at Tuanaimato and Afiamalu owned by Mr and Mrs Wulf. Tufuiopa land was purchased from a Mr Taylor for $220,000 and the balance of $580,000 was earmarked for the construction of the building. To support its loan application the plaintiff submitted a valuation report of the land and the proposed building together with other relevant documents necessary for the consideration of the loan application. The valuation report is dated the 20th May 1998 when the land was then registered under Mr Taylor. It was prepared by a government valuer who has since become the government chief valuer with the Ministry of Natural Resources and Environment. The same valuer on instructions from the plaintiff made two further valuation reports of the same land and building on the 10th June 1999 and 4th September 2000 for the very same purpose of assessing the current market value. Then again on the 6th March 2002 another valuation report by a private valuer was made at the request of the plaintiff. I shall deal later in this judgment with those valuation reports.

Construction of the building was completed in April 1999. Mrs Wulf told the court through her affidavit and oral testimony that during the course of construction the size of building was extended by 9 meters to utilise the unused part of the land and $400,000 of the company reserve funds was injected into the extension when the defendant declined financing the extension. As will be explained later when I deal with the valuation reports, this part of Mrs Wulf’s cannot be accepted.

Within 12 months since the disbursement of the loan the monthly repayments were seriously in arrears requiring the defendant to issue default notices, but the arrears continued to accumulate despite the plaintiff’s promise to settle all arrears by December 1999. Loan commitments of the plaintiff to the Westpac Bank contributed to the deteriorating repayment performance of the plaintiff to the defendant. At the request of the plaintiff the defendant in February 2000 agreed to capitalise all the outstanding arrears, extend the term of the loan from 15 years to 20 years with monthly payments of $10,990.73 to commence March 2000. Payments were made for the first 3 months then ceased completely from June 2000 to March 2002 when the defendant as mortgagee sold the land. In February 2000 the plaintiff also borrowed from the ANZ Bank secured by a second mortgage over the Tufuiopa land and a mortgage over another piece of land at Talimatau but the repayments also promptly fell into arrears and by October 2001 the ANZ Bank after several fruitless attempts to assist the plaintiff commenced to set in motion its rights to a mortgagees sale through the Registrar of the Court. An application by the plaintiff to the Court for an injunction to restrain the ANZ Bank from exercising its power of sale was declined; but the mortgagees sale scheduled for the 7th February 2002 did not eventuate as there were no bidders at the auction.

On the 24th July 2001 the defendant commenced to foreclose on the mortgage by issuing a default notice on the plaintiff to remedy the default. Arrears then owing was $142,857.68, and although the plaintiff did not remedy the default the defendant did not exercise its power of sale until March 2002 when it sold the land by private sale for the sum of $850,000. At the time the land was sold the arrears owing was $241,768 and the loan balance $1,165,383.43. There were several reasons for the delay in exercising the mortgagee sale:

(i)	In May 2000 the plaintiff requested the defendant to release the Afiamalu property for sale to pay the outstanding arrears and to inject funds into the business. The request was refused but the same request was repeated again in November together with a letter from the prospective buyer. Again the request was refused.

(ii)	In March 2001 the plaintiff requested and was allowed by the defendant to advertise the property for sale. It was listed with the National Property Service land agents from April 2001 to July 2001 for $2.5 million and with Samoa Real Estate from August 2001 to February 2002 for $1.79 million.

(iii)	In May 2001 the plaintiff submitted to the defendant a written proposal for the defendant to buy the property and lease it back to the plaintiff. The request was refused.

(iv)	In December 2001 the ANZ Bank advised the defendant that it was proceeding with its mortgagees sale. The defendant then awaited the outcome of the sale

The plaintiff now claims that when the defendant sold the property in March 2002 in the exercise of its power of sale it undersold the property by $3,136,000. Paragraphs 21 and 22 of the statement of claim allege:

21.	The defendant was negligent in failing to take reasonable precautions in relation to the sale

PARTICULARS OF NEGLIGENCE

(a)	it failed to obtain a valuation before agreeing on the purchase price to the purchaser;

(b)	it failed to inform the plaintiff that negotiations were being conducted with the purchaser;

(c)	it failed to advise the plaintiff, during negotiations between the parties that it had already accepted the offer of the purchaser.

(d)	It failed to take into account the valuation of September 2000 which took into account the cost of the new building on the land;

(e)	It failed to follow its decision to discuss the sale with the plaintiff prior to its conclusion.

22.	As a result of the negligence of the defendant the plaintiff has incurred a loss of $3,136,000.

The plaintiff then prays for orders:

(a)	that the first defendant was negligent in that it undersold the said land in the exercise of its power of sale.

(b)	for damages against the defendant in the sum of $3,136,000

(c)	for its costs

(d)	for such further relief as this Honourable Court deems just in the circumstances.

The primary subject for consideration by the court in these proceedings is the duty of the mortgagee in the conduct of the sale of the mortgaged property after it has given formal notice pursuant to section 92 of the Property Law Act 1952 (NZ). It is common knowledge that the defendant as the first mortgagee was entitled to exercise its right as mortgagee to sell the Tufuiopa property to recover its monies and both counsels have accordingly directed their submissions on the duties of the defendant as mortgagee and whether those duties have been breached.

The mortgagee is strictly speaking not a trustee, of the power of sale. It is a power given to him for his own benefit, to enable him the better to realise his debt. If he exercises it bona fide for that purpose, without corruption or collusion with the purchaser, the court will not interfere even though the sale be very disadvantageous, unless indeed the price is so low as in itself to be evidence of fraud: Warner v Jacob (1881 – 1882) 20ChD 220 at 224. Lord Herchell in the House of Lords in Kennedy v De Trafford (1897) AC 180 required the mortgagee to exercise his power of sale in good faith. He said at page 185:

"My Lords, I am myself disposed to think that if a mortgagee in exercising his power of sale exercises it in good faith, without any intention of dealing unfairly by his mortgagor, it would be very difficult indeed, if not impossible to establish that he had been guilty of any breach of duty towards the mortgagor. Lindley L J, in the court below, says that it is not right or proper or legal for him either fraudulently or wilfully or recklessly to sacrifice the property of the mortgagor". Well I think that is all covered really by his exercising the power committed to him in good faith. It is very difficult to define exhaustively all that would be included in the words "good faith", but I think it would be unreasonable to require the mortgagee to do more than exercise his power of sale in that fashion. Of course, if he wilfully and recklessly deals with the property in such a manner that the interests of the mortgagor are sacrificed, I should say that he had not been exercising his power of sale in good faith".

Kennedy v De Trafford and other earlier English cases were considered by the English Court of Appeal in Cuckmere Brick Co. Ltd v Mutual Finance Ltd (1971) 2 All ER 633 which held that in exercising his power of sale, a mortgagee has not only to act in good faith but owes a duty to the mortgagor to take reasonable care to obtain a proper price (or as Salmon LJ preferred to put it, the true market value). Salmon LJ at 643 said:

"Counsel for the defendants contends that the mortgagee’s sole obligation to the mortgagor in relation to a sale is to act in good faith; there is no duty of care and accordingly no question of negligence by the mortgagee in the conduct of the sale can arise. … . It is impossible to pretend that the state of the authorities on this branch of the law is entirely satisfactory. There are some dicta which suggest that unless a mortgagee acts in bad faith he is safe. … . 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 Tomlin v Luce (1889) 43 ChD 191 at 194. The proposition that the mortgagee owes both duties, in my judgment, represents the true view of the law."

He went on to say at page 646:

"In my view therefore Kennedy v De Trafford does not weaken the effect of the other cases to which I have referred. I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale precaution to obtain the true market value of the mortgaged properly … . No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line."

Cross LJ at page 646 stated the law as:

"A mortgagee exercising a power of sale is in an ambiguous position. He is not a trustee of the power for the mortgagor for it was given him for his own benefit to enable him to obtain repayment of his loan. On the other hand, he is not in the position if an absolute owner selling his own property but must undoubtedly pay some regard to the interests of the mortgagor when he comes to exercise the power."

The New Zealand Courts did not expressly adopt the views of the English Court of Appeal in Cuckmere Brick Co. Ltd v Mutual Finance Ltd (supra) although there was a general trend to support those views. For instance in Alexandre & Others v NZ Breweries Ltd (1974) 1 NZLR 497 the Court of Appeal comprising Richmond J, McCarthy P and Speight J were prepared to assume that a mortgagee when exercising a power of sale has a duty to a mortgagor to take reasonable care to obtain a proper price. But whether in any particular case there has been a breach of that duty should be judged in a realistic way and with ample regard to the fact that a power of sale is given to a mortgagee to enable him to obtain repayment of his advance. The NZ position was resolved by the decision of the Privy Council in Tse Kwong Lam v Wong Chit Sen (1983) 3 All ER 55, followed in Clark v UDC Finance Ltd (1985) 2 NZLR 636 which confirmed that a mortgagee owes a duty not only to exercise his power of sale in good faith, but also to take reasonable precautions to obtain the best price reasonably obtainable at the time.

The High Court of Australia it seems has not had the opportunity to consider whether the mortgagee owes a duty to the mortgagor to take reasonable care in addition to acting in good faith. In Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 the High Court considered and applied the rule laid down by Lord Herchell in Kennedy v De Trafford (supra); it did not need to consider the issue of a duty to take care, it did not arise, because on the evidence the mortgagee in exercising his power of sale disregarded the interests of the mortgagor and accordingly did not act in good faith. In Forsyth & Another v Blundell & Another & Associated Securities Ltd (1972 – 1973) 129 CLR 477 the High Court did not consider necessary to resolve the issue of whether the mortgagee owes a duty of care; by a majority of two it was held that the mortgagee did not exercise his power of sale in good faith. Menzies J in delivering the dissenting judgment observed at page 481:

"The rule to be applied here is not in doubt; it was stated authoritatively by Lord Herchell in the last century. … .

I do not think that statements in some cases such as McHugh v Union Bank of Canada or Cuckmere Brick Co. Ltd v Mutual Finance Ltd that the mortgagee is under a duty to take reasonable precautions to obtain a proper price are at odds with the rule stated by Lord Herchell. To take reasonable precautions to obtain a proper price is but part of the duty to act in good faith. This duty to act in good faith falls far short of the Golden Rule and permits a mortgagee to sell mortgaged property on terms which, as a shrewd property owner, he would be likely to refuse if the property were his own."

In my view the general trend of the authorities I have set out above leads me to the obvious conclusion which I believe represents the true view of the law on the duties of the mortgagee when exercising his power of sale. He owes both duties; namely, to act in good and to take reasonable care to obtain the best price.

I now turn to consider whether the defendant has breached its duties. The plaintiff in its statement of claim did not specifically plead that the defendant failed to act in good faith and accordingly counsel for the defendant did not address the issue of good faith in his submissions. But counsel for the plaintiff in his written submissions contended that the evidence showed lack of good faith by the defendant. I shall now deal with the issues of good faith and duty of care.

Acting in good faith

Counsel for the plaintiff contended that the defendant did not act in good faith as evidenced by:

(a)	refusal by the defendant to recognise that the building is larger and different than planned and therefore more valuable than originally proposed in the loan application.

The strength of this contention rests on the affidavit and oral testimony of Mrs Wulf, the testimony of John Sufi and the valuation reports produced by the plaintiff. John Sufi was at the material time the plaintiff’s loan was approved a quantity surveyor employed by the defendant. He was involved with the plaintiff’s project in term of assessing its viability and advising the defendant. Although he recommended approval of the plaintiff’s application for extra funding to increase the size of the building the application was nonetheless declined. He estimated the costs of extension to be $150,000. Mrs Wulf told the court that $400,000 of the company’s fund was expended on the extension. I indicated earlier I do not believe this aspect of Mrs Wulf’s evidence and I now give my reasons why. When the loan application was anticipated and prepared a valuation report of the land and building was done. It is dated 20th May 1998 and addressed to the defendant. The land which was about to be sold by Mr Taylor as a willing seller to the plaintiff as a willing buyer for $220,000 was valued at $314,000. The estimated cost of the building was copied by the valuer directly from the Architectural drawings; the intended floor area was 814 square meters and estimated cost including fees, labour costs fencing and landscaping was $833,000. On the 10th June 1999, another valuation report was done addressed to Mr & Mrs Wulf; the report repeated almost word for word the 1998 report: At page two under the heading New Main Building it states:

"There was erected over the land a new constructed building which was justly completed over last two months. …"

At page 3 the report says:

"The building type is a split-level type and it has a total floor area of 814 square meters.

According to both reports floor area of the building after construction is exactly the same as that depicted in the architectural designs of the proposed building submitted together with the original loan application in 1998. But on the 8th May 2000 the same author wrote another valuation report at the request of Mrs Wulf and the gross floor area is quoted 548.17 square meters; and again on the 6th March 2002 another valuation report again at the request of Mrs Wulf was done by a different valuer and the floor area (excluding external verandahs) is quoted as 560 square meters. This particular valuer told the court he used measuring tapes on the day of his inspection to do his measurements.

There is also a valuation report arranged by the defendant, it was done by Mr Betham on the 14th February 2002; he described the total floor area as 569.6 square meters plus verandah area measuring 67.2 square meters. Witnesses for the plaintiff confirmed that measurements of the building were taken by employees of Mr Betham in February 2002.

The valuation reports by three different authors point squarely to the fact that the finished building had a floor area of 560 to 570 square meters so that contrary to Mrs Wulf’s evidence the size of the building was not increased during construction. It was in fact decreased from the intended 814 square meters to about 570 square meters.

(b)	the plaintiff could have sold Afiamalu (there was a buyer) it could then have paid off the default notice and still have enough to meet cash flow problems in the businesses.

It was in May 2000 that the plaintiff requested the release of the Afiamalu land for sale. The promise by the plaintiff to settle all arrears by December 1999 did not eventuate; arrears continued to accumulate to February 2000 when the defendant agreed to capitalise all arrears, extend the term of the loan and resumed a new repayment schedule. It was also in February 2000 that the plaintiff took out another loan with ANZ Bank despite difficulties meeting its commitment with the defendant. The request to release Afiamalu land was properly refused but the request was repeated in November 2000 when loan repayments to both the defendant and the ANZ Bank were seriously in default. In the circumstances the refusal by the defendant to release the Afiamalu cannot be seen as lack of good faith on the part of the defendant, and in any event the plaintiff as mortgagor seriously in arrears with the loan repayment cannot dictate to the mortgagee how the mortgaged properties should be disposed of.

(c) 	the money from renting the property was adequate (with a small contribution from the plaintiff) to meet monthly payments under the loan agreement.

In December 2001 the plaintiff entered into a written lease with Kings Auto to lease the ground floor level for 12 months at a rental of $2,000. Mrs Wulf also deposed in her affidavit that she has also secured a tenant to lease the top floor. Rent monies from the leases and a small contribution from the plaintiff would have met the monthly payments. But again Mrs Wulf evidence cannot be accepted. The tenant she said she secured to lease the top floor was a company called The Island Rock Co. which wrote to Mrs Wulf on the 19th March 2001 as follows:

"We are interested in leasing the entire top section of your premises at Tufuiopa to carry out our business.

We are willing to offer up to $7,000 per month for the lease of your premises. We would like to discuss this matter further with you before we can finalise any lease agreement."

By December 2001 when the bottom floor was leased to Kings Auto the so called secured tenant has not leased the premises and by December 2001 the arrears owing was $175,823.87 so that even if the whole building was leased the income therefrom could barely pay for the monthly payments of $10,990.73 without reducing the arrears owing.

(d)	the defendant sold the property whilst a lessee was in possession without notice to it of the proposed sale.

The simple answer to this complaint is that the defendant is not obliged to serve any notice on the lessee. Pursuant to the provisions of the Property Law Act 1952 the defendant as first mortgagee is obliged only to serve notice on the mortgagor and the subsequent mortgagees which it did. In any event the plaintiff leased the premises in December 2001 after it was served with the default notice dated the 24th July 2001. 

(f)	the defendant accepted a deposit from the buyer on the 12th February 2002 and this put pressure on itself to complete that sale, to the disadvantage of the plaintiff; and 

(g)	the defendant accepted the buyer’s offer and the Betham valuation in the face of such conflict between that valuation (and the buyer’s offer) and the valuation upon which it had granted the loan and upon which it based its insurance cover.

It is true that the defendant accepted a deposit from the buyer before the purchase price was agreed upon. The price agreed to by the defendant was in line with the valuation report prepared for the defendant by Mr Betham although there were other conflicting valuation reports. I will deal fully with these valuation reports when I deal with the issue of duty of care of the defendant as mortgagee. Suffice to say that the allegations cannot support lack of good faith on the part of the defendant.

In conclusion the plaintiff cannot possibly complain that when the defendant exercised his right to sell the property it did not do so in good faith. From the history of events the loan repayments which commenced in 1998 were well outside the plaintiff’s ability to service so that within the first 12 months loan repayments were seriously in arrears. In February 2000 the defendant agreed to capitalise all arrears, increase the loan term and commence a new repayment schedule. But the repayments lasted three months only and despite its inability to service the loan it took out another loan with ANZ Bank. Then it wanted the defendant to release part of the security which the defendant refused and the plaintiff now alleges the defendant was acting in bad faith. Essentially the plaintiff accused the defendant of not acting in good faith when the defendant declined the several requests of the plaintiff which were made at the time the loan repayments were seriously in arrears and the defendant was entitled to exercise its right to sell.

Duty of Care

It can never be denied and is not denied by the plaintiff that it defaulted under the loan agreement. The plaintiff however alleges that the defendant failed to take reasonable care to obtain a fair market price for the land when it decided to sell it. Essentially the thrust of the complaint is that the defendant was negligent in underselling the plaintiff’s property for $850,000 when it was valued at $3.9 million after total completion of the project. The plaintiff’s case rests on the three valuation reports by the chief government valuer and a valuation report by a real estate agent. I will now deal with those valuations.

The defendant knew at the time the loan application was lodged that the plaintiff was purchasing the land at $220,000; it was however valued at $314,000 by the government valuer as being its then current market value by referring to a number of sales in the surrounding area in the years 1996 and 1997 and by adopting a Direct Comparison approach he assessed the value per perch of land of between $4,000 to $7,500 which translates to a quarter acre value of $160,000 to $300,000. He concluded at page 5:

"The market value for the land of the subject site falls in a range of $250,000 to $314,000. The highest and best use of the site is taken into consideration".

No mention was made of the sale of the subject land from Mr Taylor as willing seller to the plaintiff as willing purchaser for $220,000; similarly no explanation was given why the top end of the range of price of land in the area as assessed was attributed to the subject land as the current market value, other than stating that "the highest and best use of the site is taken into consideration". It was valued as a commercial property which is misleading resulting in a value which exceeded by 70% the price which the plaintiff for the land. It is described in the report as suitable for commercial development; in the 1999 report it is referred to as a potential for commercial development and in the 2000 report it is described as located within the fringe Apia Central Business District. Located at about 400 meters north of the court house and about half a mile from the Central Business District of Apia township the property is located in the fringe commercial area of Apia.

In assessing the value of the proposed building, although he intended to use the Notional Replacement Cost he could do nothing more than simply adopting the architect’s estimate of cost of construction (including fees and labour costs) of $833,000 as there was no building in existence for him to value. The architect arrived at this figure by adopting the construction rate of $685 per square meter.

$685 x 814 square meters 		$557,590.00	
Depreciation after 1 year at 1% p.a 	 $5,575.90		
			
Allowance for physical deterioration and Obsolescence at 2%	$11,151.80	$16,727.70

Total Cost of Proposed Building (Vagst inclusive)		$540,862.30	
			
Labour Cost on Contract basis 33%	$178,484.56		
			
Estimate cost of landscaping, and ash felting, boundary fence	$ 65,000.00		
			
Engineer fees @ 2% on total cost of building	$ 10,817.25		
			
Architect fees @ 4.5% on total cost of building	$ 24,338.80	$278,640.61	
			
Total Estimate Cost of Building and Development Cost		$833,002.91	

But the report at page 5 becomes completely ineffective and confusing when he referred to the Notional Replace cost approach and stated:

"The adoption construction rate is $685 per square meter. This rates are adopted from contactors and thus vagst is inclusive with materials and labourer cost."

If this is true then the cost of construction inclusive of labour costs is:

$685 x 814 square meters = $557,590

But he went on to say in the next sentence:

"The total construction cost for the project is $833,000 and the total cost of the proposed new constructed building is $540,862 and therefore the fees and miscellaneous expenses are also taken into account."

But the completed building as earlier pointed out was not 814 square meters as originally planned; the valuation reports by 3 different authors estimated the floor area (exclusive of open verandahs) at 548 to 569 square meters. Adopting 560 square meters as the floor area and using the architect’s costings, the cost of the new building should be:

$685 x 560 square meters 		$383,600.00	
			
Depreciation @ 1% 	 $ 3,836.00		
			
Physical deterioration and Obsolescence @ 2% 	 $ 7,672.00	 $ 11,508.00	
			
Total Cost of Proposed Building (Vagst inclusive)		$372,092.00	
			
Labour cost on contract basis 33%	$122,790.36		
			
Estimate cost of landscaping and ash 
felting, boundary fence	$ 65,000.00		
			
Engineer Fees at 2% on total cost of building	$ 7441.84		
			
Architect fees at 4.5% on total cost of building 	$ 16,744.14	$211,976.34	
			
Total Estimate Cost of Proposed Building & Development cost		$584,068.34	

So that when Mrs Wulf deposed in her affidavit that the extension to the building costed $400,000, it is difficult to accept and cannot be accepted that the cost of the extension was about the same as the original building.

Pages 1 to 4 of the 1999 report repeats almost word for word pages 1 to 5 of the 1998 valuation report. Under the heading Basis of Valuation the report repeats word for word what is stated in the 1998 report using exactly the same sales transaction for market evidence for assessing the current market value by adopting the Direct Comparison Approach as the valuation method as he did in the 1998. When he concluded he adopted exactly the same magic words he used in 1998 report except for the market value which has now dramatically exploded. He said:

"The market value for the land of the subject site is falls in a range of $650,000 to $965,000. The highest and best use of the site is taken into consideration. Its marketability, durability and a potential for commercial development had also being considered in this assessment."

Like the 1998 report the highest figure in the price range was taken as the market value of the land; so that for this particular land the value had increased from $314,000 in May 1998 to $765,000 in June 1999; in terms of price per perch an increase from $7,500 to more than $19,000. Counsel for the defendant has mildly labelled the assessment as ridiculous; I totally agree. Since the 1998 valuation report there have been no land sales within Tufuiopa area and in the immediate surrounding area; indeed the report specifically states the market analysis from the sales transaction indicate a general market level between $4,000 to $7,500 per perch so that the market value has virtually remained the same. Perhaps a slight annual increase. The report is completely silent as to the basis, reasons, and justifications for the extravagant escalation in price within twelve months. Under cross examination he feebly tried to justify the huge jump by referring to the physical characteristics to the land, access to the land, shape of the land and its location but all those features were also present in 1998 as well and in any event cannot justify such an increase. A valuation report is supposed to interpret the market not steer it. This report lacks sincerity and integrity; it cannot be accepted.

Like the land value, the recently completed building valued in May 1998 at $833,000 was boosted in value in June 1999 to $2,800,000 an increase of value in excess of 230% in 12 months because according to the valuer construction costs have increased from $685 per square meter in 1998 to $1200 in 1999. If he is correct then the value of the building should be:

$1200 x 814 square meters	 = $976,800

Like the 1998 report he went on to say that the total construction cost for the project is $2,816,320 without any indication whatsoever of how he proceeded from $976,000 to arrive at the final construction cost figure of $2,816,320. At least in the 1998 report he simply copied the architect’s report and adopted the architect’s costings as the costs of construction.

If the 1999 report cannot be accepted as genuine to be worthy of consideration the report by the same author dated 4th September 2000 for the purpose of assessing the market value of the property as at the 4th May 2000 must suffer the same fate. There must be a reason for having this valuation report. Like the previous two report the same market evidence is used to assess the market value so that the wordings of all reports are almost all identical. Again, like the 1999 report the value has now increased from $765,000 to $986,000 or $24,650 per perch compared to $19,000 per perch in 1999 without providing any basis, rationale or formulae for such an increase. He repeated what he stated in the 1998 and the 1999 reports that there have been no land sales in the area since the 1998 report, yet under the heading Basis For Valuation he commented as he also repeated in the 1998 and 1999 reports:

"With regards to comparable sales transactions available at Tufuiopa and Togafuafua therefore it has been found very high in demand and the market level is increased in terms of commercial development as Apia Business Area are gradually expanding throughout these areas"

If there have been no land sale for commercial development in the area since the 1998 report was compiled there can be no credibility in the report that there is high demand and the market level has increased in terms of commercial development. A prudent honest valuer would have taken the time to explain the reasons and give market justification for the increase especially so when the increase is abnormal.

Inevitably the value of building has also increased from $2,800,000 to $3,000,000 although the construction rate has remained at $1200 per square meter and the size of the floor area has decreased from 814 square meters to 548.17 square meters.

Counsel for the plaintiff argued that this final valuation of $3.9 million was made after the total completion of the project, including concrete car parking / display area and a substantial steel fence. And both mortgagees (the defendant and the ANZ Bank) adopted this valuation to obtain an insurance policy for $3 million over the property. There are several reasons why I am obliged to differ with counsel. The architects costings of the proposed building was incorporated in the 1998 valuation report and $65,000 included in the proposed costing of $833,000 was for landscaping, ash felting and boundary fence. It must also be remembered that $833,000 was the proposed cost of a building with a floor area of 814, square meters; by using the same formula and scale of costings the proposed costing of the same building with a reduced floor area of 560 square meters is $584,000. Secondly to argue that the defendant as first mortgagee and the ANZ Bank as second mortgagee adopted the third valuation report in 2000 to obtain an insurance policy for $3 million over the property is not supported by the evidence. Mrs Wulf deposed in paragraphs 9 to 11 of her affidavit:

9.	During the construction the government valuer, Patea Setefano carried out a valuation. The first was done on 20th May 1998 (a copy of which is attached). This was done to support the plaintiff’s loan application. The second was done 10th June 1999 after the building was completely but before landscaping was complete. This is attached and marked "C2" and was given to NPF for their records. The third valuation done by Patea is dated 8th May 2000 (a copy of which is attached and marked "C3") and was required by the ANZ Bank for the purposes of its security.

10.	Construction was completed in 1999 and our dream was realised. We opened for business with a store selling groceries, clothing, furniture, cars and automobile spare parts.

11.	A second mortgage was given to the ANZ bank over the land and building to secure advances to finance our shop. The NPF used the valuation by Patea Setefano (being attachment "C2" hereto) to decide their consent to that mortgage and to set priority. The valuation market "C3" was required by the ANZ Bank and was used to obtain an insurance policy of $3 million over the property from National Pacific Insurance and the ANZ mortgage. The NPF and ANZ paid for the insurance and the policy was held by the ANZ bank.

The reason for the 2000 valuation report has now been explained by Mrs Wulf; the same answer also probably explained the reasons why the 1999 and 2000 valuations gave the land an incredibly high value. For security purposes. In 1999 the monthly repayments went into arrears, it got worse in the year 2000 and the plaintiff requested the release of the Afiamalu property. It also approached the ANZ for advances to be secured by a second mortgage over the Tufuiopa property and to get favourable consideration for that loan application the plaintiff could not give the ANZ Bank the 1998 valuation report; the figures needed to be hiked; the ANZ bank would never consider taking a second mortgage over the Tufuiopa based on the value of the land in the 1998 report. Since the ANZ Bank granted the advances it must be taken that they did accept the valuation reports, but the defendant could not be said to have accepted it. Contrary to the affidavit evidence of Mrs Wulf the defendant as first mortgage did not pay insurance cover of $3 million for the property as alleged by Mrs Wulf. Joseph Tavita Malolo the Acting Manager Legal of the defendant in his affidavit which I accept as correct stated at the plaintiff requested an insurance cover of $3.3 million but the defendant declined it and paid for a cover of $1.3 million instead. So that any suggestions by the plaintiff that the defendant accepted or endorsed the 1999 and 2000 valuations of the property is without basis.

I now turn to consider the fourth valuation report compiled for the plaintiff by Mr Seru of Central Property Valuers in March 2002; about the same time the defendant sold the land. Like the first three valuation reports by the government valuer Mr Seru used the Sales Comparison approach which he said was the most common technique and the most preferred method when comparable sales are available. He also referred to Extraction Method in which the land value is extracted from the sale price of an improved property by deducting the value of the improvements estimated at their depreciated costs with the balance as representing the value of the land. But in the final analysis he appeared to rely heavily on the comparable sales approach and listed a number of land transactions in the surrounding area as well as those in close proximity to the central business district due to the lack of commercial sales in the Tufuiopa area. Since 1998 there was only one other sale in the Tufuiopa area; about two hundred meters away from the subject land, the ANZ Bank on the 8th May 2001 sold 32 perches of land and building for $350,000 to Le Vai Ltd, a very successful family business. Mr Seru estimated the land value at $187,000 per quarter acre. He also referred to other commercial sales further up the road in the years 1999 and 2000 with quarter acres valued at between $140,000 to $150,000. Then there were also sales in close proximity to if not within the Central Business District with quarter acre sections estimated at $400,000 to $800,000. Mr Seru then estimated the current market value of the land at $518,000 which in comparison to land sales, in the surrounding area is exceptionally high. The two buildings on the land sold by ANZ Bank to Le Vai were certainly inferior to the building on the subject land but the two parcels in terms of location are both inferior to those in close proximity to the Central Business District so that for Mr Seru to value this subject land comparable to the values of those lands superior in location is fallacious and misleading.

In assessing the value of the building Mr Seru also used the Replacement Cost approach which was also adopted in the first three valuations. He arrived at a figure of $1,450,000 as the Replacement Costs of improvements and a final figure of $1,380,000 as the current value of all existing improvements on the site. Replacement cost approach focuses on the estimate of the cost to replace the existing building using the same building materials. Replacement value is derived from market construction rate which in turn is determined by such factors such as cost of materials and cost of labour, and the current value of the building is derived from depreciating the age of the building. Bearing in minding that in 1998 the construction rate of the building was $685 per square meter and the cost of the completed building including fences and landscaping to be $584,068.34, the current value of the building as assessed by Mr Seru cannot be accepted. The effect of the valuation was plainly to inflate the value of both the land and improvements.

Mr Elon Betham was engaged by the defendant to do a valuation of the land, he engaged his son Murray Betham to inspect the premises, took measurements and photographs. The valuation report dated 14th February 2002 was signed by Murray Betham as valuer and by Elon Betham as certified valuer. Elon Betham also gave evidence. He spent four years working as a valuer in New Zealand and attended Polytech (as it was then called) part time. He has been in the business of valuation in Samoa for about 25 years; indeed he has been the recognised valuer for the major financial lending institutions for many years. Mr Betham adopted three valuation methods to value the subject land; the Net Rate Approach, the Rental Approach, and the Capital Value Approach and estimated the current market value of the land and improvement by engaging the three methods as follow:

Net Rate Approach 			$827,000
Rental Approach			$660,000
Capital Value Sales Approach	$713,000

He then took the average of the three methods used and concluded on the current market value as follows:

Land Value including site improvements		$276,000
Building Value					$457,000
							$733,000

In his oral evidence Mr Betham told the court that the Nett Rate Approach is the fairest method of conducting valuations to determine current market value. It is the same as that described Mr Seru in his report as the Replacement Approach and by the government valuer in his three reports as the Notional Replacement Cost Approach. Indeed the government valuer in his evidence in chief told the court that Mr Betham’s Net Rate approach is exactly the same as the Replacement Cost Approach. And if Mr Betham is of the view that the Net Rate Approach is the fairest one, it would have been good logic and good sense for him to adopt that method rather than taking the average of the three methods he adopted. If Mr Betham’s Net Rate Approach is accepted then his current market value assessment of the land should be:

Land Value 			$276,000
Building Value		$551,000
				$827,000

It is not my function and certainly not an issue in these proceedings for me to determine the true market value of the land. The simple issue is whether the defendant as mortgagee took reasonable care to obtain a reasonable price, or the true market value of the land, or to obtain a price reasonably obtainable. And in assessing whether there has been a breach of that duty the evidence must be viewed broadly and the facts should be treated in a realistic way so that the mortgagee should not be hold liable unless it is plainly in the wrong. Before proceeding to a mortgagee's sale the defendant permitted the plaintiff to attempt to sell the property in the open market from April 2001 to February 2002. No offers favourable to the plaintiff were received simply because the value was unreasonably inflated. When the ANZ Bank moved for a mortgagee's sale under the conduct of the Registrar it advised the defendant of its sale which was advertised to comply with Section 99 Property Law Act 1952. And before it accepted the offer to purchase from the eventual purchaser the defendant engaged the services of Elon Betham, a reputable valuer to value the land. It then bargained for the best price. At the time the land was sold the balance owing on the original loan of $800,000 was $1,165,383.43. The plaintiff’s claim that the defendant breached its duty to take reasonable care to obtain a reasonable price cannot succeed.

Result

(i)	Judgment for defendant

(ii)	The plaintiff is ordered to pay the defendant’s costs. If costs are not agreed to I will hear counsels on the quantum.

JUSTICE VAAI