Mortgagees- You’ve got the Power! Exercising the Mortgagee’s power of sale in good faith - how far does the duty extend? By Susan Sumars | May 2011 Area of Expertise | Commercial Disputes & Insolvency
Summary In a 2009 Supreme Court of Victoria decision, it was decided that human rights must be taken into account by a mortgagee when selling a property, particularly in circumstances where the property is a residential family home and where the mortgagor has a ‘home occupation interest’. However, on appeal, the Victorian Court of Appeal decided (20 April 2011) that the notion of international human rights did not require the mortgagee’s duty imposed in s77(1) of the Transfer of Land Act (1958) (‘TLA’) to sell ‘in good faith and having regard to the interest of the mortgagor’ as extending to the right of ‘home occupation.’ Further, although the duty requires mortgagees to have regard to the mortgagor’s interests, the duty does not extend as far as requiring the mortgagee to take account of the mortgagor’s preference as to the order of sale of the security properties.
Who Does This Impact? Lenders, borrowers and their respective legal advisors.
What Action Should Be Taken? The decision underlines the importance of a mortgagee obtaining advice on the appropriate sale marketing and realisation strategy where security is held over more than one title. It would be unreasonable to require a mortgagee to do more than exercise such power by taking consideration of the mortgagor’s preference as to the order of sale of properties, where some doubt exists as to the saleability of some lots, or whether the sale of a particular lot or lots will be sufficient to satisfy the full amount of the debt1.
Background Facts: •
MBF Investments Pty Ltd (‘MBF’) held a first mortgage over a property as security for loan facilities extended to Mr Nolan, which was subdivided into three lots: Lot 1, Lot 2 and Lot 3.
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ANZ also held a second mortgage as security over Mr Nolan’s property, and the property was also subject to an equitable charge or lien arising out of a Court order concerning a dispute between Mr Nolan and a former business associate, Mr Collie.
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Mr Nolan and his family had lived in the residential home on Lot 1 for many years, and Lots 2 and 3 were vacant land.
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Following Mr Nolan’s failure to make repayments as required under the mortgage, and after giving the required notices, MBF exercised its power of sale.
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Mr Nolan requested that MBF sell only Lots 2 and 3, as their values would be sufficient to satisfy the debt outstanding, so that he could retain Lot 1 (the residential home).
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After taking advice, MBF proceeded to sell Lot 2, followed by Lot 1 and then Lot 3 at auction on the same day. The sale prices obtained at the auctions of Lots 2 and 3 alone were sufficient to pay out Mr Nolan’s total liability to MBF.
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Mortgagees- You’ve got the Power! Exercising the Mortgagee’s power of sale in good faith - how far does the duty extend? by Susan Sumars
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Mr Nolan initiated legal proceedings in the Supreme Court of Victoria claiming damages from MBF for an alleged breach of the duty to sell ‘in good faith and having regard to the interest of the mortgagor’ imposed on it by s77(1) of the TLA.
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The trial judge in the Supreme Court proceedings, Vickery J, upheld Mr Nolan’s claim and ordered that MBF pay him damages.
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MBF appealed against the decision of Vickery J to the Supreme Court of Appeal.
The Law Section 77(1) of the TLA provides as follows: If within one month after the service of such notice or demand or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by instalments, subject to such terms and conditions as the mortgagee or annuitant thinks fit ...
The Issues on Appeal The central issue concerned the scope of the duty owed by MBF to Mr Nolan under s77(1) of the TLA, and whether MBF breached such duty by selling the residential home on Lot 1 immediately after the sale of Lot 2, when it had already recovered most of the debt secured by its mortgage by selling Lot 2 and, whether it would have recovered the balance of its debt if it had instead sold Lot 3 next. The Court of Appeal considered the following issues: (a) Is the scope of the mortgagee’s duty under s 77(1) of the TLA to sell in good faith and having regard to the interests of the mortgagor limited to taking reasonable steps to obtain the best price for the property? Does it require a mortgagee to have regard to a ‘home occupation interest’? (b) Having regard to the advice which MBF received both prior to and during the course of the auction, did MBF breach the duty it owed to Mr Nolan under s 77(1) of the TLA?
The Decision on Appeal In relation to the issue of whether a ‘home occupation right’ existed, Justices Neave, Redlich and Weinberg stated that: It is clear that Mr Nolan had an equitable right ‘to have the land restored’ if he repaid the debt. He could have prevented the sale from proceeding if he had taken the steps described... But that right is not a right of home occupation... The right of ‘restoration’ on payment applies to all mortgaged property and is not confined to property used for a home. Further, the exercise of the right depends on the mortgagor being able to repay the amount owing to the mortgagee or into court. It had no relevance to Mr Nolan’s claim unless he paid the amount then owing to MBF…
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Mortgagees- You’ve got the Power! Exercising the Mortgagee’s power of sale in good faith - how far does the duty extend? by Susan Sumars
Mr Nolan did not have a ‘home occupation right’ of the kind identified by his Honour… 2 In relation to the nature of the mortgagee’s duty under s 77(1), their Honours stated that: In this case, there is no doubt that MBF obtained a proper price (indeed a very good price) on the sale of the property. However, Mr Nolan seeks to uphold the trial judge’s decision that MBF wilfully disregarded his interest in retaining Lot 1 and acted ‘manifestly unreasonabl[y]. We do not consider that a mortgagee’s duty to act in good faith and having regard to the interests of the mortgagor is confined to taking reasonable steps to obtain the best price consistent with its entitlement to realise its security… However, where there are genuine doubts about the saleability of some lots or whether the sale of a particular lot or lots will be sufficient to satisfy the full amount, we do not consider that the mortgagee’s duty requires it to take account of the mortgagor’s preference as to the order of sale. The mortgagee’s duty has never been recognised as extending so far 3. It was held that s 77(1) of the TLA, which specifically permits the sale of land in lots ‘at one or several times’ gives a broad discretion, would be difficult to reconcile with a duty on the mortgagee to have regard to the mortgagor’s preferences as to the order in which lots should be sold, except where there was no possibility that the mortgagee would be prejudiced in recovering the full amount by following the mortgagor’s proposed course of action4. It was also held that international human rights principles did not require the word ‘interests’ in s 77(1) of the TLA to be interpreted as extending to the right of ‘home occupation’.
Did MBF Breach the Duty of Good Faith? Their Honours considered that Vickery J was incorrect in deciding that MBF breached its duty of good faith owed to Mr Nolan and acted in reckless disregard of his interests. The conclusion was reached for the following reasons: 1. The onus was on Mr Nolan to establish that MBF acted in reckless or wilful disregard of his interests. There was sufficient doubt about whether Lot 3 would sell and the amount for which it would realise, to justify the decision, which MBF took after the sale of Lot 2, to sell Lot 1 before auctioning Lot 35. 2. Any decision made by MBF had to take account of the possibility that the other security holders would seek to enforce their claim over the property. MBF owed a duty to have regard to the interests of other persons including other security holders. This was a relevant consideration in MBF’s exercise of its power under s 77(1) of the TLA6; 3. Finally, it was not clear that the order of sale of the lots preferred by Mr Nolan would be sufficient to discharge his indebtedness to MBF and the other security. In that circumstance, Mr Nolan’s position as mortgagor did not give him any right to require that the securities should be offered for sale in a particular order. Such a right would be inconsistent with the mortgagee’s right to realise its security7. There was no evidence supporting the inference that MBF acted in wilful or reckless disregard of Mr Nolan’s interests and accordingly, MBF had not breached its duty of good faith.
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Mortgagees- You’ve got the Power! Exercising the Mortgagee’s power of sale in good faith - how far does the duty extend? by Susan Sumars
Implications To summarise the position: (a) a mortgagee is not a trustee of the power of sale, which is given to the mortgagee to enable the realisation of the security interest; (b) a mortgagee must act in good faith, that is conscionably, and cannot sell for a purpose other than that for which the power of sale is conferred; (c) a mortgagee is not required to place the interests of the mortgagor above the mortgagee’s interests in recovering the debt. For example, the mortgagee can sell the property at a time of the mortgagee’s choice, even though the property might realise a higher price if the sale were postponed; (d) the mortgagee cannot disregard the interests of the mortgagor by simply selling for a price which will cover the amount of the loan. The Mortgagee must take reasonable steps to obtain the best price consistently with its right to enforce its security interest. This requires the mortgagee to consider how the property should be advertised and to allow an appropriate time between the advertisement and the sale; (e)
the mortgagee must also have regard to the interests of subsequent security holders; and
(f ) if there is no doubt that the sale of the lots preferred by the mortgagor would be sufficient to discharge the debt owed to the relevant mortgagee and of any other security holders whose interest the mortgagee is required to consider, a failure to sell the preferred lots may breach the mortgagee’s duty to sell in good faith8.
End notes 1
MBF Investments Pty Ltd v Nolan [2011] VSCA 114 at par 90. All other paragraph numbers in footnotes refer to this judgment.
2
pars 62 - 64
3
pars 85 – 90.
4
par 92
5
par 154
6
par 159
7
par 161
8
par 100
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Mortgagees- You’ve got the Power! Exercising the Mortgagee’s power of sale in good faith - how far does the duty extend? by Susan Sumars
For more information, please contact: Susan Sumars
Lawyer T: 03 8600 5137 susan.sumars@turkslegal.com.au
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