Mortgagee Exercising Power of Sale - Practical Issues by TurksLegal

Mortgagee Exercising Power of Sale Practical Issues A PAPER BY PAUL ANDERSON DECEMBER 2010

Mortgagee Exercising Power of Sale - Practical Issues

Summary A recent Supreme Court decision deals with two practical issues for a mortgagee exercising power of sale, namely, the consequences of failure to serve a Section 57(2)(b) Notice at the correct address and how to handle abandoned goods.

Who Does This Impact? Banks and lenders.

What Action Should Be Taken? Banks should check their procedures to ensure Section 57(2)(b) Notices are served on the mortgagor at the correct address and should also check the wording of the relevant clauses in their mortgage documentation dealing with abandoned goods.

Contents:

TURKSLEGAL

Facts

Goods Claim

Ineffective Service Claim

Conclusion

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Mortgagee Exercising Power of Sale - Practical Issues by Paul Anderson

The recent Supreme Court decision of Thambiappah v Commonwealth Bank of Australia considers two very practical issues that arise frequently when a mortgagee exercises its power of sale. The plaintiff claimed damages on two counts, namely: •

Firstly, in the sum of $217,000.00 for goods in the mortgaged premises wrongfully disposed of by the mortgagee; and

•

Secondly, in an unspeciﬁed sum because the mortgagee had served the Notice under Section 57(2)(b) of the Real Property Act 1900 at the wrong address of the mortgagor before exercising its power of sale.

Facts The plaintiff was a former owner of two properties in Toongabbie and Werrington mortgaged to the defendant Bank. Following default by the plaintiff, the Bank sold both properties. The Bank also disposed of certain goods that were in the garage of the Werrington property by taking them to a local rubbish tip. The Bank had given the plaintiff written notice on several occasions at the correct address to remove the goods without receiving any reply. The plaintiff claimed the goods were worth $217,000.00 but the Bank tendered evidence of a valuer that the value was a maximum of $1,350.00 and a minimum of $440.00. In any event, the Bank’s case was that the cost of removal of the goods exceeded their sale value. Before exercising a power of sale, the mortgagee must ﬁrst serve upon the mortgagor a notice under Section 57(2)(b) of the Real Property Act 1900 giving the mortgagor one month within which to remedy any alleged default. In the case of the Werrington property, but not the Toongabbie property, the plaintiff alleged that the relevant notice had been served at the wrong address, i.e. her address at the time of execution of the mortgage and not her later address at Houison Street, Westmead (which was known to the Bank).

Goods Claim As a general statement but subject to the particular wording of a mortgage, a mortgage grants a mortgagee rights over a specified parcel of real estate. Although the real estate will include items of personalty that have been affixed to the real estate i.e. fixtures, real estate does not include moveable goods present or on the real estate. This partly explains why when a bank gives a mortgage to a company (as distinct from an individual), it will almost invariably take as security a mortgage over the real estate and a collateral fixed and floating charge over all the other assets of the company. A fixed and floating charge would clearly extend to any goods located in mortgaged premises. The above general statement of the law is subject to any particular wording in the mortgage concerned. In this case, clause 21.5 of the mortgage applied if the mortgagor defaulted. Clause 21.5 was in the following terms: ‘If we enter into possession of THE PROPERTY we may:

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Mortgagee Exercising Power of Sale - Practical Issues by Paul Anderson

(b) Remove goods (for example) your furniture on THE PROPERTY and store them. If you do not reclaim possession of the stored goods within fourteen days of our telling you where the goods are, we may dispose of the goods on your behalf. We pay any proceeds from storing the goods into an account we open with us in your name. We are not liable to you in any way due to any action we take under this clause.’ There was an initial problem with the plaintiff’s case in that she had not listed the goods nor assigned them a value. It even appeared that some of the goods were not owned by the plaintiff but by relatives or their companies. However, the Judge was content to consider the larger issues without dwelling on the question of ownership, as in the result his decision provided a complete answer to the plaintiff’s case. The plaintiff contended that the word ‘dispose’ in clause 21.5 did not entitle the Bank to destroy the goods. However, Harrison J disagreed and found that, subject to giving the required notice, the clause did in fact give the Bank power to destroy or discard the goods. In any event, the Judge found that the exclusion of liability in the ﬁnal sentence of clause 21.5 was a complete answer to the plaintiff’s claim. The plaintiff did not suggest that such clause was invalid or inoperative, that it was unjust or unfair or that she did not understand it or that she did not know of its existence. The decision highlights the need to have a similar clause in every lender’s mortgage documentation. Without an appropriate clause in the mortgage dealing with abandoned goods, the Bank will become an unwilling bailee of the goods. The Bank would then have a duty to look after the goods without a power to sell or dispose of them.

Ineffective Service Claim It was common ground that the Bank had to give the plaintiff notice of default before exercising its power of sale. Clause 21.2 of the mortgage provided that such notice should be left at or sent by prepaid post to ‘the address last notiﬁed’. Section 57 of the Real Property Act also provided that the Notice required by the Section had to be served in accordance with Section 170 of the Conveyancing Act 1919. One of the methods of service speciﬁed by Section 170 was if the Notice was ‘left at or sent by post to the last residential or business address in or out of New South Wales of the person to be served.’ The evidence established that the Notice had been served by the Bank at the address in the loan application, i.e. Astley Lane, Westmead, instead of the last known address of the mortgagor at Houison Street, Westmead. The Bank had been aware of the latter address for a considerable period of time and had served several other notices, including a notice to remove goods, at that address. A Section 57(2)(b) Notice had clearly not been validly served in accordance with the Act. What was the effect of the failure? The Judge was informed that the Plaintiff was still in debt to the Bank following exercise of its power of sale, although the amount was not in direct evidence. The Bank had also made a successful claim upon the relevant mortgage guarantee insurer but it was not clear whether the payment extinguished the plaintiff’s indebtedness to the Bank. Relying upon the 1972 High Court case of Inglis v Commonwealth Trading Bank of Australia, Harrison J found that the plaintiff’s sole cause of action following the ineffective service was a suit for accounts and she had no independent action at law for damages.

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Mortgagee Exercising Power of Sale - Practical Issues by Paul Anderson

His Honour also relied upon the following statement by Hutley, J in the 1982 Supreme Court case of Colin D Young Pty Limited v Commercial and General Acceptance Limited – ‘… the only proceedings available are, when the sale has been completed, proceedings for accounts between the parties upon the basis that the mortgagee ought to be debited with sums in excess of what he obtained and the mortgagor is to be credited with sums which the mortgagee ought to have received if it had exercised its power of sale properly… A party cannot, as it were, have little bits of accounts. There is one account and one account only and the issue is what is owed and what is not owed.’ Harrison, J pointed out that another factor to consider was a concern to avoid a multiplicity of actions and to promote the efficient and expedient use of the Court’s resources. His Honour continued – ‘whatever legal or philosophical formulation is used, there is no support for the proposition that a disgruntled mortgagor can choose to mount several different cases against a mortgagee, raising various complaints about the exercise of its power of sale or about alleged delinquencies in the manner of performance of a multitude of other obligations said to constrain it, except within the structured and ordered confines of the one account between them. In forming this view I consider it to be relevant first, that Werrington has been sold, but secondly, that far from there being a surplus following that sale which the defendant is holding on trust for the plaintiff, there is an admitted deficiency. In this sense, the account between the plaintiff and the defendant is not yet finalised or closed… A dispute remains between the plaintiff and the defendant on the status of the one account between them.’ Presumably, in the course of such a suit for accounts, the plaintiff would need to demonstrate what loss in monetary terms she suffered as a result of the failure of the Bank to serve notice at the correct address. The final result was that the plaintiff’s claim for damages on both counts was dismissed with costs.

Conclusion The decision highlights the need for banks and lenders to check the wording in their mortgage documentation dealing with abandoned goods and also to check their procedures to ensure that all notices, including a Notice under Section 57(2)(b), are served at the correct address of the mortgagor. The decision is also valuable to clarify the consequences of failure to serve a Notice at the correct address.

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Mortgagee Exercising Power of Sale - Practical Issues by Paul Anderson

For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

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