N8181
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

CONSOLIDATED PROCEEDINGS

WS. NO. 1136 of 2015

BETWEEN:
JOHN KOIMA
Plaintiff

AND
ROMILY KILA PAT in his capacity as Secretary for Lands and a Delegate of the Minister for Lands & Physical Planning
First Defendant

AND
BENJAMIN SAMSON, in his capacity as the Acting Registrar of Titles, Department of Lands & Physical Planning
Second Defendant

AND
HON. BENNY ALLAN, MP, Minister for Department of Lands & Physical Planning
Third Defendant

AND
AUGUSTINE RAVI, Financial Controller of NCDC
Fifth Defendant

AND
NATIONAL CAPITAL DISTRICT COMMISSION (NCDC)
Sixth Defendant

AND:
O.S. NO.806 OF 2015 (CC2)

BETWEEN:
FINANCE CORPORATION LIMITED (Company No. 1-14333)
Plaintiff

AND:
HON. BENNY ALLAN, M.P. in his capacity as the Minister for Lands & Physical Planning
First Defendant

AND:
THE INDEPENDENT STATE OF PAPUA NEW GUINEA
Second Defendant

AND:

WS. NO. 1368OF 2015

BETWEEN:
FINANCE CORPORATION LIMITED (Company No. 1-14333)
Plaintiff

AND:
JOHN KOIMA trading as ETAPANA CONTRACTORS
Defendant

Waigani: 	Kandakasi, DCJ.
2017:	12th October
2020:	5th February

LAND – Compulsory acquisition of – Compensation for land and improvements lawfully brought upon the land  – Building and structure built and business conducted out of – Whether acknowledge of application for change of purpose from residential to commercial residential and application for building board approval and later grant of license to operate mini supermarket amounts to tacit grant of approval? –Physical Planning Act 1989 governs all developments in cities and towns for good reason – Requirements – Failure to meet – Criminal offence – Structures, buildings and other improvements brought upon the land amount to illegal structures and improvements – Principle of no gain from criminal or illegal conduct applicable  - Sections 12-16, 23 of the Lands Act 1996 and ss.5,74 (1) and 98 of the Physical Planning Act 1989. 

MORTGAGES – Compulsory acquisition of mortgaged land - Right of mortgagee – Entitlement to compensation separate from mortgagor or landlord – Amount of compensation not to exceed compensation legally due and payable to mortgagor and deductible from mortgagor’s compensation - Excess on mortgage recoverable from mortgagor - Sound law based on true nature of mortgages – Section 34, 35, 38, 39, 40 and 43 of Lands Act 1996

PRACTICE & PROCEDURE – Pleadings – A party not at liberty to raise issues at trial that has no foundation in the pleadings - Lacking pleadings no consequence on determining what a plaintiff is entitled to as a matter of law.

Papua New Guinea Cases cited:

Anim Agai Motoi v. Nationwide Microbank Ltd (2016) N6177
Bank of PNG v. Derick Sakatea Niso (2004) N2664
Bank of South Pacific Ltd v. The Public Curator (2003) N2320
Golobadana No. 35 Ltd vs. Bank of South Pacific Limited (2002) N2309
MVIT v. John Etape [1994] PNGLR 596
Michael Pundari v. Niolam Security Ltd (2011) SC1123 
PNGBC v. Jeff Tole (2002) SC694
PNG Deep Sea Fishing Ltd v. Luke Critten (2010) SC1126
Rimbunan Hijau (PNG) Ltd v. Ina Enei (2017) SC1605
Rage Augerea v. The Bank South Pacific Ltd (2007) SC869
Tony David Raim v. Simon Korua (2010) SC1062
Uma More v. University of Papua New Guinea [1985] PNGLR 401
Pija Grannies Ltd v. Rural Development Bank Ltd (2011) SC1327
Wake Goi v. First Investment Finance Ltd (2017) N7059

Legislation cited:

Lands Act 1996 
Physical Planning Act 1989

Counsel:

J. Kolo, for the Plaintiff in WS 1136 of 2015 and Defendant in 1368 of 2015
S. Tiankin, for the First to the Fourth Defendants in WS 1136 of 2015 and First and Second Defendants in OS NO806 of 2015
B. Lai, for the Plaintiff in WS 1368 of 2015 and OS806 of 2015
M. Mukwesipu, for the Fifth and Sixth Defendants in WS 1336

5th February, 2020

1.	  KANDAKASI DCJ:  The State compulsorily acquired from John Koima his property as part of land required for the now completed and operating Kumul Overpass in the Gordons/Erima area of the National Capital District. As at the time of the acquisition the property was described as Residential Lease, Section 116 Allotment 2, Hohola, NCD, with a mortgage registered in favour of Finance Corporation Limited (Fin Corp). The State offered Koima compensation for the property only as a residential property.  Koima asked for more to cover for commercial improvements upon the property in terms of units for rent and a mini supermarket, which he built according to plans he had submitted and not yet approved by the NCDC Building Board but operated under a trading license issued by the NCDC and renewed from time to time with taxes paid.   Without formally raising in its defence, the State refused to entertain this part of the Claim on the basis that there was no approval converting the residential purpose of the property to residential/commercial and the buildings were not approved by the Building Board. A court ordered mediation resulted in Koima accepting a payment of K866,000.00 in compensation for his land and the value of a residential house, living all other related issues to be resolved by the parties or determination by the Court.

Relevant Issues 

2.	 Although the parties submit there are 4 questions to be determined, in my view, the four issues can be reduced to two and one more obvious issue to be added. The issues are:

1.	Is Koima entitled to compensation for his commercial use of his property notwithstanding the lack of formal approval but on the basis of him having obtained the relevant trading licenses, paid his taxes and lodged his application for the required approval?

2.	Is the State precluded from raising the lack of the required approval for Koima’s commercial activities on the property without first raising it in a formal defense to Koima’s claim?

(3) 	Is Fin Corp as a mortgagee entitled to separate compensation for compulsory acquisition of the mortgaged property?

Relevant Facts

3.	 The relevant facts giving rise to these issues are straight forward and are not in dispute.  John Koima was the registered owner of the property. At all relevant times, the property remained on the register of titles as residential property.  On 05thNovember1999, Koima applied to NCDC Building Authority to extend his residential property to a mini supermarket. He submitted the designs and or drawings of the building he proposed to build. He paid the prescribed application fee of K53.67. Subsequently, NCD Building Board confirmed that Koima’s submission of his application with all the necessary documents required for consideration and approval. Relying on that representation, Koima proceeded to extended property and constructed a mini supermarket on the property.  Then on 15thJune 2000, he paid the prescribed fees and applied to Department of Lands and Physical Planning for variation of the nature of the lease from Residential Lease to Business/Residential Lease.  Despite numerous follow ups with both the NCDC Building Board and the Department of Lands and Physical Planning either of the approvals sought were granted. 

4.	  After making improvements to the property, Koima applied for and obtained a trading license for his mini supermarket which has been the subject of repeated renewals.  He paid the required land rentals and fees for his trading license. As noted, already Koima mortgaged the property in favour of Fin Corp for certain finance advances. He has paid through two of his companies Jomar Trading Limited and Etapana Contractors all outstanding Income Tax to the Internal Revenue Commission.  

5.	 On 05thDecember 2013, Koima was issued with a formal “Notice to Treat” under the Lands Act 1996 as amended for the purposes of compulsory acquisition of the property for parts of the Erima Fly-Over Bridge. On the 16thJanuary 2014, the Valuer General carried out a valuation of the property.  Then on 11th February 2013 the Valuer General valued the property at Four Million Six Hundred and Fifty Thousand Kina (K4, 650, 000.00). That valuation included the land and improvement that were brought upon it. 

6.	 Apart from the land and improvements, Koima submitted in response to the “Notice to Treat” a claim for loss of rental income of K17, 360,000.00. That comprised of:

		(a)	Loss of income for 10 rental rooms at K7, 280,000.00.
		(b)	Loss of Income for bakery at K6, 240,000.00.
		(c) 	Loss of Income for mini-supermarket at K3, 840,000.00

7.	 At the same time, Koima informed the State of his outstanding mortgage arrears with 	Fincorp then in the sum of K2, 930,009.77.

8.	 The State offered to pay Koima compensation of K215, 000.00 for the land and a further K615, 000.00 for the improvements, bringing the total to K830,000.00.  In his response, Koima informed the State that he was willing to accept the amount assessed for the land and improvements alone in accordance with the Valuer General’s valuation. 	

9.	 On 20thFebruary 2014, the NCDC Physical Planning Board served Koima with a demolition notice. Koima took issue with that notice and issued WS (HR) No.102 of 2014. On 12thMarch 2013, the State formally compulsorily acquired the property. That resulted in Koima issuing proceedings OS (HR) No. 03 of 2014 which was later ordered to be converted to proceed by way of pleadings.  Following an order for mediation, the State and Koima settled the OS proceedings with Koima agreeing to receive and the State paid a total of K866,000.00 for the land and the residential house on the property.  That led to a discontinuance of OS (HR) No. 03 of 2014.  The settlement and discontinuance of the OS proceedings was expressly without prejudice to any claim, suit, action or other proceedings which Koima or any interested party may wish to bring against the State, the NCDC or their servants and agents arising out of any commercial use of the land by Koima and his business partner, Jomar Trading Ltd.

10.	    Following the mediated outcome, Koima filed proceeding, WS. 1136 of 2015, claiming loss of business loss, value of the improvements not covered under the K866,000.00 settlement and the outstanding mortgage arrears due to Fin Corp. 

11.	  Meanwhile, Fincorp issued proceeding, OS.806 of 2016 against the State and WS 1368 of 2015 against Koima seeking to protect and or enforce its mortgage interest in the property.  Fin Corp secured judgement against the State out of OS 806 of 2016, with damages to be assessed. Eventually, OS. 806 of 2016, WS. 1136 of 2015 and WS. 1368 of 2015, were all consolidated and referred to mediation.  Through mediation, WS 1368 of 2015 got resolved between Fin Corp and Koima.  That was conditional on Koima succeeding in his claim in WS 1136 of 2015 against the State.

Issue 2 – Is the State precluded from raising the issue of Koima failing to meet requirements for his commercial use of the property?

12.	  Bearing the factual background in mind, I will deal with the second main issue first because it is a simple issue and can be quickly disposed of.  

13.	   It is trite law that no party can raise any issue without first pleading the issue in their pleadings.  The law on pleadings and the role or function of pleadings has been repeatedly stated by the Supreme Court in several of its judgments.  One of the latest statements of the relevant principles is the majority (Cannings and Yagi JJ with Davani J dissenting) decision in Michael Pundari v. Niolam Security Ltd (2011) SC1123.  There the Court stated the principles in the following terms:

“98.      We agree with the relevance of the leading case MVIT v James Pupune [1993] PNGLR 370. The rule is that a party cannot lead evidence in a trial on matters he has not pleaded. The purpose of pleadings was explained clearly by the Supreme Court (Kapi DCJ, Jalina J, Doherty J) in that case, in the following terms:

It is well established that pleadings and particulars have the following functions:

(a)	they furnish a statement of the case sufficiently clear to allow the other party a fair opportunity to meet it.

(b)	they define the issues for decision in the litigation and thereby enable the relevance and admissibility of evidence to be determined at the trial.

(c)	they give a defendant an understanding of a plaintiff's claim in aid of the defendant's right to make a payment into Court.

99.     To similar effect is a string of other Supreme Court decisions such as Uma More v University of Papua New Guinea [1985] PNGLR 401, MVIT v John Etape [1994] PNGLR 596, PNGBC v Jeff Tole (2002) SC694 and Tony David Raim v Simon Korua (2010) SC1062. In Raim, the Supreme Court (Gavara-Nanu J, Davani J, Makail J) emphasized that, through the pleadings a plaintiff must sufficiently plead the material facts that establish the cause of action being prosecuted, in their Honours’ own words, they said:

… the general rule of pleadings is, a party must first sufficiently plead the material facts establishing the elements by particular rising them:  see Order 8, Rules 29 & 32 of the National Court Rules.  It is also trite that pleadings lay a foundation of a cause of action and act as a means of informing the opposing party of what to expect at trial.  They give the opposing party the opportunity to identify the issues for trial and the kind of evidence to be led at trial.”

14.	    Given that trite legal position, the answer to the issue before the Court in this case, must be resolved against the State.   This means the State is not entitled to raise the issue of Koima failing to meet statutory requirements for his commercial use of the property.  However, this does not preclude the Court from taking into account all the relevant and applicable statutory law that has a bearing and is integral to determining the compensation that is payable for the compulsory acquisition of the property. 

Issues 1 & 3 - Compensation for his commercial use of the property?

15.	  Of the two remaining issues I will deal with Koima’s claim for compensation for his commercial use of the property first. 

16.	  The most relevant provisions on compulsory acquisition are ss.12-16 of the Lands Act 1996. In summary these provisions provide for the process of acquisition. That involves the following:

(1)	a diligent inquiry by the State to ascertain the owners or persons who have any interest in the land it proposes to acquire;

(2)	upon competition of step one above, the State must then serve a notice inviting the person (s) it identifies as owners of the land or having an interest in it to treat with the Minister for the sale or surrender to him on behalf of the State the identified land or the owner’s interest in the land for a public purpose;

(3) 	on the publication of a notice under s.13(1), the land or chattel to which the notice applies becomes vested in the State free of any charges and any interests and the owners get an entitlement to compensation;

(4) 	within two months from the date of the service of the notice, the identified owner must specify:

(a)	the interest claimed by him in the land; and
(b)	the amount for which he is agreeable to sell his interest in the land; and
(c)	the name and address of any other person known to him to have an interest in the land and the nature of that interest;

(5) 	upon receipt of the above particulars the State treats with the owner of the land or enter into an agreement with that person (s) for the acquisition; and

(6) 	by notice in the National Gazette, declare that the land, is acquired by compulsory process under the Act for a public purpose specified in the notice in cases where:
(a) 	notice to treat is not withdrawn; or
(b) 	despite diligent search and inquiry, the owner cannot be located; and or
(c)  	a certificate under s. 13 (6) has been issued.”

17.	    The parties’ arguments do not reveal much of an issue on this process. The only issue is on the measure of damages or the basis to assess the compensation due to Koima.  Most relevantly, s.23 of the Act provides for the principles on which compensation is to be assessed.   Then specifically on the issue before this Court, subsection 1 of this section stipulates:

 “In the determination of the amount of compensation payable in respect of land acquired by compulsory process under this Act, regard shall be had to—
(a)	the value of the land at the date of acquisition…”

18.	   The amount of compensation payable can be arrived at by an agreement between the Minister for Lands and the landowner.  Failing any such agreement, it can be ascertained by arbitration or by judicial determination.  Parties have in this case, reached an agreement on the value of the land and improvement in the form of a residential house up to a total of K866,000.00 and that has been paid over to Koima. What remains to be resolved is Koima’s claim for compensation for his commercial use of the property.

19.	  There is no dispute that at all material times the property remained formally on the title as a residential property.  Despite that, Koima brought upon the land commercial improvements in the form of a mini supermarket and a number of rental rooms for which he has had trading license for a number of years.  This he claims was based on an application he submitted to the NCDC Building Board for the buildings, which was acknowledged and the Department of Lands and Physical Planning for change of the registered status of the land from residential to residential/commercial.  Without a doubt, what Koima brought upon the land were unauthorized improvements or illegal structures or buildings and used them to conduct business.  From the figures he is claiming in damages against the State, he has made substantial sums of money out of these businesses.  Clearly, therefore he has substantially gained from his own illegal conduct and unauthorized use of the property.   Having done so, he now wants the State to compensate him from losing out on that illegal gain.

20.	 The grant of license to trade for his illegally constructed mini supermarket is of no consequence.  Papua New Guinea is well known for corruption in the public sector.   If the system and processes set in place were properly followed, there would have been no grant of the trading license.  If those who were administering the license properly checked the status of the premises out of which the business was proposed to be conducted, they would have ascertained the fact that there was no approval of the buildings out of which the mini super market and other businesses were to operate out of.   In any case, Koima was under an obligation to demonstrate to the satisfaction of the licensing authority that he has met all of the requirements for the buildings and were built in accordance with approval given and that he could legally conduct businesses out of the buildings.

21.	    It is well settled law that no one can be allowed to gain from one’s own illegal conduct or act.  What the Supreme Court said in PNG Deep Sea Fishing Ltd v. Luke Critten (2010) SC1126 in trying to make sense of conflicting Supreme Court decisions in cases of fraudulent transfer of titles is on point.  There the Court said:

“The decision in Mudge and Kotachi could work well with one complimenting the other. Where title in certain property has passed a number of hands and or a considerable period of time has passed and is hard to trace back what has happened, the need to bring fraud home to the eventual title holder is sensible and could apply. However, where title in a property has not passed hands or the circumstances leading to either grant or transfer of title can easily be traced and established, the requirement to bring fraud as determined by Mudge and Koitachi home to the eventual title holder may be inappropriate.  The title holder knowing this position of the law may well have deliberately or by his conduct facilitated a breach or otherwise a failure to follow all relevant processes and requirements for a proper, fair, and transparent grant or transfer of title over State Leases, which may fall short of fraud as held by Mudge and Koitachi to gain from his own illegal, improper, unfair and questionable conduct.  This would no doubt run into conflict with well-established principles of law which say that, no one can be permitted to gain from his or her own illegal conduct. Against such possibilities, Emas does make sense.”
									(Emphasis added)
	
22.	   Later in its decision in Rimbunan Hijau (PNG) Ltd v. Ina Enei (2017) SC1605, the Supreme Court cited this statement of the law and applied it in the case before it in the context of trespass in this way:

“Trespass is clearly an illegal activity, which is both a criminal and a civil wrong in nature which can result in criminal prosecution and a civil claim for damages.  Following the English common law or case law approach as adopted and applied in PNG already, effectively allows a trespasser to gain from his or her own criminal or unlawful conduct and get away with it save only for the small amount of damages as assessed in the past cases.  We are of the view therefore that, any assessment of damages must have a clear reflection of the extent of a trespasser’s gain out of his or her illegal entry and use of another’s land, and not the rate that applies to rental of city and town land areas or indeed any such rate in terms of price per square meters.  Both fairness and equity demand that the damages that ultimately get assessed against a trespasser should indeed reflect the gains the trespasser has made out of his or her illegally using another’s land as in this case, which may far exceed the price per square meter.”
									(Emphasis added)

23.	   Improvements or developments brought upon land in PNG are governed by the Physical Planning Act 1989 as amended.  As its preamble states, the aim of the Act is to and does “establish a comprehensive mechanism for physical planning at national and provincial levels of government and to provide powers for the planning and regulation of physical development … and for related purposes”.  Section 5 then provides an almost exhaustive list of factors National and Provincial Physical Planning Boards to take into account to make a decision on a proposal for development.  The list reads:

“(a)	the provisions of the Environmental Planning Act (Chapter 370), the Environmental Contaminants Act (Chapter 368), and the Conservation Areas Act (Chapter 362);
(b)	the impact on the environment and, where harm to the environment is likely to be caused, any means that may be employed to protect the environment or to reduce that harm;
(c)	the effect of any development on amenity including the external appearance of the development in so far as this affects amenity;
(d)	the character, location, bulk, scale, size, height and density of any development;
(e)	the social and the economic aspects of the matter;
(f)	the size and shape of land which is proposed to be developed, the siting of any building or works thereon, and the area to be occupied by any development;
(g)	whether land is unsuitable for development by reason of its being, or being likely to be, subject to flooding, tidal inundation, subsidence, slip, bush fire, earthquake, volcanic eruption, or to any other risk whether natural or man-made;
(h)	the relationship of any development to any development on adjoining land or on other land in the locality;
(i)	whether the proposed means of entrance to and exit from any development, and from the land on which any development is to take place, are adequate and whether adequate provision has been made for the loading, unloading, maneuvering and parking of vehicles within any development or on any land;
(j)	the amount of traffic likely to be generated by any development, particularly in relation to the capacity of the road system in the locality and the probable effect of that traffic on the movement of traffic on that road system;
(k)	whether public transport services are available and adequate;
(l)	whether utility services are available and adequate;
(m)	the landscaping of the land on which development is proposed and whether trees on the land should be preserved;
(n)	representations made by a public authority in relation to the development of an area, and to the rights and powers of that public authority;
(o)	representations on physical planning grounds made by a member of the general public;
(p)	policy directives given by the Minister or a provincial minister provided that such directives may not conflict with any other provisions of this Act;
(q)	whether any development will affect the approach to an aerodrome or aeronautical navigation aids or any other civil aviation facilities;
(r)	whether any development will affect the operation of a port;
(s)	an approved plan for education prepared under Division II.2 Part 2 Division (2) of the Education Act (Chapter 163);
(t)	any approved plan for health;
(u)	the mineral resources of land whether proven or potential; and
(v)	any other matters which can be considered reasonably relevant to physical planning.”

24.	   As can be seen from this list, the factors for consideration before there can be any approval of proposed developments covers the important aspects of health and safety as well as sizes, shapes and looks amongst other important factors.  This obviously indicates the whole purpose of the Act.  In order to achieve that purpose, the Act allows for the declaration and creation of areas and zones. Section 74 (1) makes it an offence for any person to carry “out development, or use… a building or land, in a zone for a purpose that is not an authorized purpose in relation to the building or land…” This is reinforced by s.98 of the Act which makes it an offence for a person to (a)	use or permit any land or building to be used or (b) allows development to be carried out otherwise than in accordance with authorizations under the Act.  

25.	   There is no provision in the Act or elsewhere which authorizes a person upon lodging his application for rezoning and or approval of buildings, structures or improvements he wishes to bring upon his land to proceed with the relevant works pending the required approval. The problem of illegal structures and carrying on or conducting business in unauthorized places is a serious and common problem in PNG.  At the smaller scales are the youngsters and other people selling goods at the traffic lights in Port Moresby and elsewhere. At the larger scale is the kinds of activities Koima carried on in his property without proper authorization and approval.   Granting Koima’s wish through his claim now before this Court is to license illegal constructions and conduct of activities outside and in breach of the Physical Planning Act, which are in fact criminal offences. As noted, he is not entitled to gain from his illegal and criminal conduct.  Finding and doing the opposite would open up a flood gate the country or indeed any civilized city and country can ill afford. No doubt, that would be an afront to organised, orderly and control development or improvements to land in our cities and towns which is absolutely necessary for the good, safety and health of the cities and towns. 

26.	   For these reasons, I answer the first issue in the negative. That is to say Koima is not entitled to claim damages for his commercial use of the property, which constitute criminal activities prohibited by ss.74 (1) and 98 of the Physical Planning Act. He received compensation for his land and improvements that were lawfully brought upon the land with the payment of the K866,000.00 in compensation.  That sufficiently compensated him for the compulsory acquisition of his property.

27.	  This leaves me to deal with the remaining question of Fin Corp as a mortgagee’s claim against the State for the compulsory acquisition of the land or property over which it had a registered mortgage.  

Issue 3 - Is FinCorp as a mortgagee entitled to separate compensation for compulsory acquisition of the mortgaged property?

28.	   The Lands Act 1996 does make a provision for this kind of eventuality.  The relevant provisions are in Division 7, sections 33 – 47.  The most relevant provisions are ss. 34, 35, 38, 39 and 43. The first of these provisions reads as follows:

“34. Rights of Mortgagee on compulsory acquisition.

(1) 	Where land acquired by compulsory process under this Act was, at the date of acquisition, subject to a mortgage, the mortgagee may either—
(a)	claim compensation under Division 2; or
(b)	by notice to the Minister, waive his rights to compensation.

(2) 	If the mortgagee makes a claim for compensation, he shall state in his claim—
(a)	the amount of principal due under the mortgage at the date of acquisition; and
(b)	the amount of interest, costs and charges due under the mortgage at that date.

(3) 	The Minister may, by written notice served on a person who is or may be a mortgagee, require him, at his option—
(a)	to make a claim under this Act for compensation as mortgagee; or
(b)	to waive his rights to compensation.

(4)	If the person referred to in Subsection (3) fails to make a claim for compensation in accordance with this Act within two months, or such further period as the Minister in writing allows, after the service of the notice under that subsection, he shall be deemed to have waived his rights to compensation as mortgagee.

(5)	Where a mortgagee claims compensation under this Act, the acquisition of the land has, to the extent to which the compensation payable to the mortgagee under Section 39(1) is sufficient to satisfy the mortgage debt and interest, costs and charges due to the mortgagee under the mortgage as at the date of acquisition, the effect of extinguishing the liability of the mortgagor under the mortgage as from the date of acquisition.

(6)	A mortgagee who waives his rights to compensation is debarred from claiming or recovering as mortgagee any compensation or other amount from the State.

(7)	Waiver of his rights to compensation by a mortgagee, or failure by a mortgagee to claim compensation, does not affect his rights and remedies against the mortgagor or in respect of land included in the mortgage other than the land acquired.”

							(Underlining mine)

29.	    Clearly, this provision gives a mortgagee of a land that is compulsorily acquired either of two options. One is to claim compensation and the other is to waive any compensation.  This is dependent on the mortgagee receiving notice of the compulsory acquisition.  That is in turn under s. 35 (1), dependent on the owner, amongst others providing particulars of any mortgage over the property and the mortgagor providing the information required to avoid the risk of the State dealing with any other person claiming to be a mortgagee.  The particulars and information required most importantly, include amongst others:

“(i)	the name and address of the mortgagee; and
(ii)	the amount of principal due under the mortgage at the date of acquisition; and
(iii)	the amount of interest, costs and charges due to the mortgagee under the mortgage at that date.”

30.	   If compensation is opted for then, s. 34 (4) provides that, a claim for compensation must be lodged with the State within 2 months from the acquisition or within such further period as may be extended by the Minister for Lands.   By virtue of s. 34 (5), a lodgment for compensation has the effect of extinguishing a mortgagor’s obligations to the mortgagee under the relevant mortgage.  At the same time, s. 34 (4) provides that, a failure to lodge a claim for compensation within the required time and in accordance with the Act amounts to a waiver.  A waiver of compensation would under s. 34 (6), bar a mortgagee from any right to compensation from the State.  By virtue of s. 34(7), that does not however, affect a mortgagee’s rights under the relevant mortgage as against a mortgagor.

31.	  Section 38 then clearly stipulates that unless a mortgagor or mortgagee was a party to an agreement or proceedings in which compensation was determined:

“(a) the rights of a mortgagor claiming compensation are not affected by a determination of the compensation payable to a mortgagee; and
(b)	the rights of a mortgagee claiming compensation are not affected by a determination of the compensation payable to the mortgagor or another mortgagee...”

32.	  The is not all there is to the rights of mortgagors and mortgagees in respect of properties compulsorily acquired by the State.  Section 39 provides clearly as to the amount of compensation payable to a mortgagee in these terms:

“39. 	Compensation to mortgagee.
(1) 	The compensation payable to a mortgagee is an amount equal to the sum of—
(a)	the principal secured by the mortgage at the date of acquisition; and
(b)	any interest, costs or charges due to the mortgagee under the mortgage at that date,
but not exceeding the compensation payable to the mortgagor in respect of the land.”
									(Underlining mine)

33.	   Clearly, the compensation payable to a mortgagee is no more than the compensation due and payable to a mortgagor.  The next subsection of s. 39 reiterates that position in the following terms:

“(2) 	For the purposes of Subsection (1), the compensation payable to the mortgagor shall be deemed to be—
(a)	if there was only one mortgage over the land—the compensation that would have been payable to the mortgagor if there had been no mortgage over the land; ….
less the amount, or the sum of the amounts, of principal, interest, costs and charges due at the date of acquisition to a mortgagee or mortgagees in respect of a mortgage or mortgages having priority over the mortgage in respect of which the compensation is to be determined.”

34.	   It is also clear that, although, the right to compensation of a mortgagor and mortgagee are different and a determination of one does not affect the other, the amount of compensation ultimately payable are not different and separate from each other.  Instead, the compensation due to a mortgagor or a landlord is the principle compensation from which the amount due in compensation to a mortgagee should be deducted and paid to the mortgagee.  The wording in s. 40 makes this abundantly clear. That provision reads:

“40. Deduction of mortgagee's compensation from mortgagor's compensation.
The compensation payable to a mortgagee under Section 39(1) shall be deducted from the compensation that would have been payable to the mortgagor if the mortgage did not exist, and interest under Section 47 is payable to the mortgagor on the reduced amount only.”

35.	   This is understandable from a proper understanding of all factors in play and more so the true nature of mortgages.  The first factor in that regard is the true nature of mortgages.  I first commented on the nature of mortgages in my decision in Golobadana No. 35 Ltd vs. Bank of South Pacific Limited (2002) N2309.  That was in the context of a mortgagor’s right of redemption.  In that context I noted at page 16 of the judgement that the whole nature of mortgages is a security for the repayment of monies lent and secured by a mortgage.  Earlier on at page 15 of the judgement, I noted that the old position at common law enabled a mortgagee to take an absolute and indefeasible interest over the mortgage property upon failure of a mortgagor to pay on the date specified for payments due under the mortgage. This position changed however in equity which gave prominence to a mortgagor’s right to redeem his property which is a fundamental characteristic of all mortgagers now.  

36.	   I repeated this observation of the true nature of mortgages in a number of subsequent cases namely, Bank of PNG v. Derick Sakatea Niso (2004) N2664 and Bank of South Pacific Ltd v. The Public Curator (2003) N2320. Many other national and Supreme Court judgments endorsed the statement of the principle as to the true nature of mortgages.  These line of cases, include the decisions in Wake Goi v First Investment Finance Ltd (2017) N7059 (per David J.), Anim Agai Motoi v Nationwide Microbank Ltd (2016) N6177 (per Cannings J.), Rage Augerea v. The Bank South Pacific Ltd (2007) SC869 (per Salika, Jalina and Kandakasi, JJ) and Pija Grannies Ltd v Rural Development Bank Ltd (2011) SC1327.

37.	 The second relevant factor is the fact that, there is only one property. As such, there can only be one lot of compensation payable for a property that is compulsorily acquired.  The property itself is the foundation for the existence of a mortgage. Thirdly, the amount of compensation that is ultimately, payable is for the value of the land inclusive of proper and legal improvements, and not the value of the mortgage or any illegal business or structure. If that were not the case, and compensation in amounts separate from what is due to the mortgagor was permissible, that would effectively allow for payment over and above the value of the property.  That would certainly be unfair and unjust compared to other property owners, whose property that are also compulsorily acquired and set double standards. Fourthly, mortgage contracts are entered into and exist for enforcement against the valued of the land that has been pledge as a security and nothing more concerning mortgaged properties. Finally, as s. 43 confirms, a mortgagee would still be entitled to recover from the mortgagor any shortfall in a recovery of the funds the mortgagee advanced and secured by a mortgage.   Section 43 reads:

“43. 	Saving of certain rights of mortgagee.

Where land that is subject to a mortgage is acquired by compulsory process under this Act and the whole or part of the mortgage debt is not discharged by virtue of this Act, the mortgagee retains, in respect of the whole or the part of the mortgage debt, as the case may be, his rights and remedies against the mortgagor (other than rights and remedies in relation to the land acquired) and in relation to any other land that is subject to the mortgage.”

Answer to the Question

38.	 Based on the foregoing discussions, an answer to the question under consideration is obvious. Fin Corp as a mortgagee is entitled to separate compensation for compulsory acquisition of the mortgaged property.  However, such compensation cannot exceed what is due and payable or paid in compensation to the mortgagor or the landlord.  The amounts thus payable in compensation to a mortgagee are derivable by way of deduction from that which is payable in compensation to the landlord or mortgagor and not separately from the State.  If after such deduction, there is still more owing from the principle amounts advanced under the mortgage, they remain to be recovered from the mortgagor, Koima.

39.	   In the present case, there was only one mortgage over the property that was compulsorily acquired by the State.  The mortgagor, Mr. Koima is entitled to compensation for the land less the illegal improvements to the property.  The compensation legally due to Koima as the landlord and mortgagor resolved and paid in the sum of K866,000.00.  Fin Corp as the mortgage is entitled to compensation but from the compensation legally due and owing to Koima, namely the K866,000.00 that has already be paid to him and not from the State. If such amounts are inadequate and cannot fully discharge the mortgage, the mortgagee as right of recovery of the balance in accordance with the mortgage from the mortgagor. 

40.	  Should Fin Corp seek to recover any balance due and owing under its mortgage with Koima and his business, the parties must be guided by the true nature of mortgages in dealing with that part of the problem.  They must also be guided by what appears to be a voluntary assumption of risk by both of them in entering into a mortgage relationship without properly appreciating and proceeding on the basis of the correct valuation of the property.  The amount of money lent was based on what appears to be a valuation that included illegal structures and business conducted on the property utilizing the illegal buildings or structures.  Fin Corp was under an obligation to ensure that its assessment of the loan and more so the property offered for mortgage was up to the correct legal value and that it could reasonably foresee a recovery of the principle advanced in the event of any default or compulsory acquisition by the State. Of course, that would be dependent on the level of disclosure by Koima as to the correct legal status of the illegal structures when he put in his application for the loan or advance from Fin Corp.

Answers in Summary 

41.	  In summary I answer the first two questions presented in this case in the negative.  As for the third and final question I answer thatquestions in the affirmative.  This is however with three qualifications.  The first is that, the amounts payable to Fin Corp as the mortgagor cannot exceed the compensation payable and paid to Koima as the mortgagor for the property with the legally authorized improvements.  Secondly, Fin Corp as a mortgagee’s compensation are payable by way of deduction from the compensation payable or those paid to Koima as the mortgagor. Third and finally, Fin Corp as the mortgagee retains the right to recover any balance due and owing on the mortgage from the mortgagor.

Outcome

42.	   The parties are required to consider the answers to the various questions and the judgment generally and return to the Court with draft orders either finalizing this proceeding or directions for an expedited resolution of any outstanding issue not resolved by this judgment or the parties mediated agreement.  The matter is fixed to return for that purpose on 11th February 2020.
________________________________________________________________
Kolo & Associates Lawyers:	Lawyers for the Plaintiff in WS 1136 of 2015 and Defendant in OS 1368 of 2015
Solicitor General: 	Lawyers for the First to the Fourth Defendants in WS 1136 of 2015 and First and Second Defendants in OS of 806 
B.S. Lai Lawyers: 	Lawyers for the Plaintiff in WS 1368 of 2015 and OS806 of 2015
In House Counsel: 	Lawyers for the Fifth and Six Defendants in WS 1136 of 2015