TURKALERT 1TURKSLEGAL

Background Facts:

• MBFInvestmentsPtyLtd(‘MBF’)heldafirstmortgageoverapropertyassecurityforloanfacilitiesextendedtoMrNolan,whichwassubdividedintothreelots:Lot1,Lot2andLot3.

• ANZalsohelda secondmortgageas securityoverMrNolan’sproperty,and thepropertywasalsosubject toanequitablechargeorlienarisingoutofaCourtorderconcerningadisputebetweenMrNolanandaformerbusinessassociate,MrCollie.

• MrNolanandhisfamilyhadlivedintheresidentialhomeonLot1formanyyears,andLots2and3werevacantland.

• FollowingMrNolan’sfailuretomakerepaymentsasrequiredunderthemortgage,andaftergivingtherequirednotices,MBFexerciseditspowerofsale.

• MrNolanrequestedthatMBFsellonlyLots2and3,astheirvalueswouldbesufficienttosatisfythedebtoutstanding,sothathecouldretainLot1(theresidentialhome).

• Aftertakingadvice,MBFproceededtosellLot2,followedbyLot1andthenLot3atauctiononthesameday.ThesalepricesobtainedattheauctionsofLots2and3aloneweresufficienttopayoutMrNolan’stotalliabilitytoMBF.

BySusanSumars|May2011

Mortgagees- You’ve got the Power!ExercisingtheMortgagee’spowerofsaleingoodfaith-howfardoesthedutyextend?

AreaofExpertise|CommercialDisputes&Insolvency

SummaryIna2009SupremeCourtofVictoriadecision,itwasdecidedthathumanrightsmustbetakenintoaccountbyamortgageewhensellingaproperty,particularlyincircumstanceswherethepropertyisaresidentialfamilyhomeandwherethemortgagorhasa‘homeoccupationinterest’.

However, on appeal, theVictorian Court of Appeal decided (20 April 2011) that thenotionofinternationalhumanrightsdidnotrequirethemortgagee’sdutyimposedins77(1)oftheTransfer of Land Act (1958)(‘TLA’)tosell‘ingoodfaithandhavingregardtotheinterestofthemortgagor’asextendingtotherightof‘homeoccupation.’Further,although theduty requiresmortgagees to have regard to themortgagor’s interests,the duty does not extend as far as requiring themortgagee to take account of themortgagor’spreferenceastotheorderofsaleofthesecurityproperties.

Who Does This Impact?Lenders,borrowersandtheirrespectivelegaladvisors.

What Action Should Be Taken?The decision underlines the importance of a mortgagee obtaining advice on theappropriate salemarketingand realisationstrategywhere security isheldovermorethanonetitle.Itwouldbeunreasonabletorequireamortgageetodomorethanexercisesuchpowerbytakingconsiderationofthemortgagor’spreferenceastotheorderofsaleofproperties,wheresomedoubtexistsastothesaleabilityofsomelots,orwhetherthesaleofaparticularlotorlotswillbesufficienttosatisfythefullamountofthedebt1.

2TURKALERTTURKSLEGAL

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

• MrNolaninitiatedlegalproceedingsintheSupremeCourtofVictoriaclaimingdamagesfromMBFforanallegedbreachofthedutytosell‘ingoodfaithandhavingregardtotheinterestofthemortgagor’imposedonitbys77(1)oftheTLA.

• ThetrialjudgeintheSupremeCourtproceedings,VickeryJ,upheldMrNolan’sclaimandorderedthatMBFpayhimdamages.

• MBFappealedagainstthedecisionofVickeryJtotheSupremeCourtofAppeal.

The Law

Section77(1)ofthe TLA providesasfollows:

Ifwithinonemonthaftertheserviceofsuchnoticeordemand orsuchotherperiodas isfixed insuchmortgageorchargethemortgagorgrantororotherpersonsdonotcomplywiththenoticeordemandthemortgageeorannuitantmay,ingoodfaithandhavingregardtotheinterestsofthemortgagorgrantororotherpersons,sellorconcurwithanyotherpersoninsellingthemortgagedorchargedlandoranypartthereof,togetherorinlots,bypublicauctionorbyprivatecontract,atoneorseveraltimes,andforasumpayableinoneamountorbyinstalments,subjecttosuchtermsandconditionsasthemortgageeorannuitantthinksfit...

The Issues on Appeal

ThecentralissueconcernedthescopeofthedutyowedbyMBFtoMrNolanunders77(1)oftheTLA,andwhetherMBFbreachedsuchdutybysellingtheresidentialhomeonLot1immediatelyafterthesaleofLot2,whenithadalreadyrecoveredmostofthedebtsecuredbyitsmortgagebysellingLot2and,whetheritwouldhaverecoveredthebalanceofitsdebtifithadinsteadsoldLot3next.

TheCourtofAppealconsideredthefollowingissues:

(a) Isthescopeofthemortgagee’sdutyunders77(1)ofthe TLA tosellingoodfaithandhavingregardtotheinterestsofthemortgagorlimitedtotakingreasonablestepstoobtainthebestpricefortheproperty?Doesitrequireamortgageetohaveregardtoa‘homeoccupationinterest’?

(b) HavingregardtotheadvicewhichMBFreceivedbothpriortoandduringthecourseoftheauction,didMBFbreachthedutyitowedtoMrNolanunders77(1)oftheTLA?

The Decision on Appeal

Inrelationtotheissueofwhethera‘homeoccupationright’existed,JusticesNeave,RedlichandWeinbergstatedthat:

ItisclearthatMrNolanhadanequitableright‘tohavethelandrestored’ifherepaidthedebt.Hecouldhavepreventedthesalefromproceedingifhehadtakenthestepsdescribed...Butthatrightisnotarightofhomeoccupation...Therightof‘restoration’onpaymentappliestoallmortgagedpropertyandisnotconfinedtopropertyusedforahome.Further,theexerciseoftherightdependsonthemortgagorbeingabletorepaytheamountowingtothemortgageeor intocourt.IthadnorelevancetoMrNolan’sclaimunlesshepaidtheamountthenowingtoMBF…

3TURKALERTTURKSLEGAL

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

MrNolandidnothavea‘homeoccupationright’ofthekindidentifiedbyhisHonour…2

Inrelationtothenatureofthemortgagee’sdutyunders77(1),theirHonoursstatedthat:

Inthiscase,thereisnodoubtthatMBFobtainedaproperprice(indeedaverygoodprice)onthesaleoftheproperty.However,MrNolanseekstoupholdthetrialjudge’sdecisionthatMBFwilfullydisregardedhisinterestinretainingLot1andacted‘manifestlyunreasonabl[y].

Wedonotconsiderthatamortgagee’sdutytoactingoodfaithandhavingregardtotheinterestsofthemortgagorisconfinedtotakingreasonablestepstoobtainthebestpriceconsistentwithitsentitlementtorealiseitssecurity…

However,wheretherearegenuinedoubtsaboutthesaleabilityofsomelotsorwhetherthesaleofaparticularlotorlotswillbesufficienttosatisfythefullamount,wedonotconsiderthatthemortgagee’sdutyrequiresittotakeaccountofthemortgagor’spreferenceastotheorderofsale.Themortgagee’sdutyhasneverbeenrecognisedasextendingsofar3.

Itwasheldthats77(1)oftheTLA,whichspecificallypermitsthesaleoflandinlots‘atoneorseveraltimes’givesabroaddiscretion,wouldbedifficulttoreconcilewithadutyonthemortgageetohaveregardtothemortgagor’spreferencesastotheorderinwhichlotsshouldbesold,exceptwheretherewasnopossibilitythatthemortgageewouldbeprejudicedinrecoveringthefullamountbyfollowingthemortgagor’sproposedcourseofaction4.

Itwasalsoheldthatinternationalhumanrightsprinciplesdidnotrequiretheword‘interests’ins77(1)oftheTLAtobeinterpretedasextendingtotherightof‘homeoccupation’.

Did MBF Breach the Duty of Good Faith?

TheirHonoursconsideredthatVickeryJwasincorrectindecidingthatMBFbreacheditsdutyofgoodfaithowedtoMrNolanandactedinrecklessdisregardofhisinterests.

Theconclusionwasreachedforthefollowingreasons:

1. TheonuswasonMrNolantoestablishthatMBFactedinrecklessorwilfuldisregardofhisinterests.TherewassufficientdoubtaboutwhetherLot3wouldsellandtheamountforwhichitwouldrealise,tojustifythedecision,whichMBFtookafterthesaleofLot2,tosellLot1beforeauctioningLot35.

2. AnydecisionmadebyMBFhadtotakeaccountofthepossibilitythattheothersecurityholderswouldseektoenforcetheirclaimovertheproperty.MBFowedadutytohaveregardtotheinterestsofotherpersonsincludingothersecurityholders.ThiswasarelevantconsiderationinMBF’sexerciseofitspowerunders77(1)oftheTLA6;

3. Finally, itwas not clear that theorder of sale of the lots preferredbyMrNolanwouldbe sufficient todischargehisindebtednesstoMBFandtheothersecurity.Inthatcircumstance,MrNolan’spositionasmortgagordidnotgivehimanyrighttorequirethatthesecuritiesshouldbeofferedforsaleinaparticularorder.Sucharightwouldbeinconsistentwiththemortgagee’srighttorealiseitssecurity7.

TherewasnoevidencesupportingtheinferencethatMBFactedinwilfulorrecklessdisregardofMrNolan’sinterestsandaccordingly,MBFhadnotbreacheditsdutyofgoodfaith.

4TURKALERTTURKSLEGAL

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

Tosummarisetheposition:

(a) amortgageeisnotatrusteeofthepowerofsale,whichisgiventothemortgageetoenabletherealisationofthesecurityinterest;

(b) amortgageemustactingoodfaith,thatisconscionably,andcannotsellforapurposeotherthanthatforwhichthepowerofsaleisconferred;

(c) amortgageeisnotrequiredtoplacetheinterestsofthemortgagorabovethemortgagee’sinterestsinrecoveringthedebt.Forexample,themortgageecansellthepropertyatatimeofthemortgagee’schoice,eventhoughthepropertymightrealiseahigherpriceifthesalewerepostponed;

(d) themortgageecannotdisregardtheinterestsofthemortgagorbysimplysellingforapricewhichwillcovertheamountoftheloan.TheMortgageemusttakereasonablestepstoobtainthebestpriceconsistentlywithitsrighttoenforceitssecurityinterest.Thisrequiresthemortgageetoconsiderhowthepropertyshouldbeadvertisedandtoallowanappropriatetimebetweentheadvertisementandthesale;

(e) themortgageemustalsohaveregardtotheinterestsofsubsequentsecurityholders;and

(f ) ifthereisnodoubtthatthesaleofthelotspreferredbythemortgagorwouldbesufficienttodischargethedebtowedtotherelevantmortgageeandofanyothersecurityholderswhoseinterestthemortgageeisrequiredtoconsider,afailuretosellthepreferredlotsmaybreachthemortgagee’sdutytosellingoodfaith8.

End notes

1MBF Investments Pty Ltd v Nolan [2011] VSCA 114atpar90.Allotherparagraphnumbersinfootnotesrefertothisjudgment.

2pars62-64

3pars85–90.4par925par1546par1597par1618par100

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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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