Mortgagees - Youve got the Power!

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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 mortgagees 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 mortgagors interests, the duty does not extend as far as requiring the mortgagee to take account of the mortgagors preference as to the order of sale of the security properties.

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  • TURKALERT 1TURKSLEGAL

    Background Facts:

    MBFInvestmentsPtyLtd(MBF)heldafirstmortgageoverapropertyassecurityforloanfacilitiesextendedtoMrNolan,whichwassubdividedintothreelots:Lot1,Lot2andLot3.

    ANZalsohelda secondmortgageas securityoverMrNolansproperty,and thepropertywasalsosubject toanequitablechargeorlienarisingoutofaCourtorderconcerningadisputebetweenMrNolanandaformerbusinessassociate,MrCollie.

    MrNolanandhisfamilyhadlivedintheresidentialhomeonLot1formanyyears,andLots2and3werevacantland.

    FollowingMrNolansfailuretomakerepaymentsasrequiredunderthemortgage,andaftergivingtherequirednotices,MBFexerciseditspowerofsale.

    MrNolanrequestedthatMBFsellonlyLots2and3,astheirvalueswouldbesufficienttosatisfythedebtoutstanding,sothathecouldretainLot1(theresidentialhome).

    Aftertakingadvice,MBFproceededtosellLot2,followedbyLot1andthenLot3atauctiononthesameday.ThesalepricesobtainedattheauctionsofLots2and3aloneweresufficienttopayoutMrNolanstotalliabilitytoMBF.

    BySusanSumars|May2011

    Mortgagees- Youve got the Power!ExercisingtheMortgageespowerofsaleingoodfaith-howfardoesthedutyextend?

    AreaofExpertise|CommercialDisputes&Insolvency

    SummaryIna2009SupremeCourtofVictoriadecision,itwasdecidedthathumanrightsmustbetakenintoaccountbyamortgageewhensellingaproperty,particularlyincircumstanceswherethepropertyisaresidentialfamilyhomeandwherethemortgagorhasahomeoccupationinterest.

    However, on appeal, theVictorian Court of Appeal decided (20 April 2011) that thenotionofinternationalhumanrightsdidnotrequirethemortgageesdutyimposedins77(1)oftheTransfer of Land Act (1958)(TLA)tosellingoodfaithandhavingregardtotheinterestofthemortgagorasextendingtotherightofhomeoccupation.Further,although theduty requiresmortgagees to have regard to themortgagors interests,the duty does not extend as far as requiring themortgagee to take account of themortgagorspreferenceastotheorderofsaleofthesecurityproperties.

    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.Itwouldbeunreasonabletorequireamortgageetodomorethanexercisesuchpowerbytakingconsiderationofthemortgagorspreferenceastotheorderofsaleofproperties,wheresomedoubtexistsastothesaleabilityofsomelots,orwhetherthesaleofaparticularlotorlotswillbesufficienttosatisfythefullamountofthedebt1.

  • 2TURKALERTTURKSLEGAL

    Mortgagees- Youve got the Power!Exercising the Mortgagees power of sale in good faith - how far does the duty extend?

    by Susan Sumars

    MrNolaninitiatedlegalproceedingsintheSupremeCourtofVictoriaclaimingdamagesfromMBFforanallegedbreachofthedutytosellingoodfaithandhavingregardtotheinterestofthemortgagorimposedonitbys77(1)oftheTLA.

    ThetrialjudgeintheSupremeCourtproceedings,VickeryJ,upheldMrNolansclaimandorderedthatMBFpayhimdamages.

    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) Isthescopeofthemortgageesdutyunders77(1)ofthe TLA tosellingoodfaithandhavingregardtotheinterestsofthemortgagorlimitedtotakingreasonablestepstoobtainthebestpricefortheproperty?Doesitrequireamortgageetohaveregardtoahomeoccupationinterest?

    (b) HavingregardtotheadvicewhichMBFreceivedbothpriortoandduringthecourseoftheauction,didMBFbreachthedutyitowedtoMrNolanunders77(1)oftheTLA?

    The Decision on Appeal

    Inrelationtotheissueofwhetherahomeoccupationrightexisted,JusticesNeave,RedlichandWeinbergstatedthat:

    ItisclearthatMrNolanhadanequitablerighttohavethelandrestoredifherepaidthedebt.Hecouldhavepreventedthesalefromproceedingifhehadtakenthestepsdescribed...Butthatrightisnotarightofhomeoccupation...Therightofrestorationonpaymentappliestoallmortgagedpropertyandisnotconfinedtopropertyusedforahome.Further,theexerciseoftherightdependsonthemortgagorbeingabletorepaytheamountowingtothemortgageeor intocourt.IthadnorelevancetoMrNolansclaimunlesshepaidtheamountthenowingtoMBF

  • 3TURKALERTTURKSLEGAL

    Mortgagees- Youve got the Power!Exercising the Mortgagees power of sale in good faith - how far does the duty extend?

    by Susan Sumars

    MrNolandidnothaveahomeoccupationrightofthekindidentifiedbyhisHonour2

    Inrelationtothenatureofthemortgageesdutyunders77(1),theirHonoursstatedthat:

    Inthiscase,thereisnodoubtthatMBFobtainedaproperprice(indeedaverygoodprice)onthesaleoftheproperty.However,MrNolanseekstoupholdthetrialjudgesdecisionthatMBFwilfullydisregardedhisinterestinretainingLot1andactedmanifestlyunreasonabl[y].

    Wedonotconsiderthatamortgageesdutytoactingoodfaithandhavingregardtotheinterestsofthemortgagorisconfinedtotakingreasonablestepstoobtainthebestpriceconsistentwithitsentitlementtorealiseitssecurity

    However,wheretherearegenuinedoubtsaboutthesaleabilityofsomelotsorwhetherthesaleofaparticularlotorlotswillbesufficienttosatisfythefullamount,wedonotconsiderthatthemortgageesdutyrequiresittotakeaccountofthemortgagorspreferenceastotheorderofsale.Themortgageesdutyhasneverbeenrecognisedasextendingsofar3.

    Itwasheldthats77(1)oftheTLA,whichspecificallypermitsthesaleoflandinlotsatoneorseveraltimesgivesabroaddiscretion,wouldbedifficulttoreconcilewithadutyonthemortgageetohaveregardtothemortgagorspreferencesastotheorderinwhichlotsshouldbesold,exceptwheretherewasnopossibilitythatthemortgageewouldbeprejudicedinrecoveringthefullamountbyfollowingthemortgagorsproposedcourseofaction4.

    Itwasalsoheldthatinternationalhumanrightsprinciplesdidnotrequirethewordinterestsins77(1)oftheTLAtobeinterpretedasextendingtotherightofhomeoccupation.

    Did MBF Breach the Duty of Good Faith?

    TheirHonoursconsideredthatVickeryJwasincorrectindecidingthatMBFbreacheditsdutyofgoodfaithowedtoMrNolanandactedinrecklessdisregardofhisinterests.

    Theconclusionwasreachedforthefollowingreasons:

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

    2. AnydecisionmadebyMBFhadtotakeaccountofthepossibilitythattheothersecurityholderswouldseektoenforcetheirclaimovertheproperty.MBFowedadutytohaveregardtotheinterestsofotherpersonsincludingothersecurityholders.ThiswasarelevantconsiderationinMBFsexerciseofitspowerunders77(1)oftheTLA6;

    3. Finally, itwas not clear that theorder of sale of the lots preferredbyMrNolanwouldbe sufficient todischargehisindebtednesstoMBFandtheothersecurity.Inthatcircumstance,MrNolanspositionasmortgagordidnotgivehimanyrighttorequirethatthesecuritiesshouldbeofferedforsaleinaparticularorder.Sucharightwouldbeinconsistentwiththemortgageesrighttorealiseitssecurity7.

    TherewasnoevidencesupportingtheinferencethatMBFactedinwilfulorrecklessdisregardofMrNolansinterestsandaccordingly,MBFhadnotbreacheditsdutyofgoodfaith.

  • 4TURKALERTTURKSLEGAL

    Mortgagees- Youve got the Power!Exercising the Mortgagees 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) amortgageeisnotrequiredtoplacetheinterestsofthemortgagorabovethemortgageesinterestsinrecoveringthedebt.Forexample,themortgageecansellthepropertyatatimeofthemortgageeschoice,eventhoughthepropertymightrealiseahigherpriceifthesalewerepostponed;

    (d) themortgageecannotdisregardtheinterestsofthemortgagorbysimplysellingforapricewhichwillcovertheamountoftheloan.TheMortgageemusttakereasonablestepstoobtainthebestpriceconsistentlywithitsrighttoenforceitssecurityinterest.Thisrequiresthemortgageetoconsiderhowthepropertyshouldbeadvertisedandtoallowanappropriatetimebetweentheadvertisementandthesale;

    (e) themortgageemustalsohaveregardtotheinterestsofsubsequentsecurityholders;and

    (f ) ifthereisnodoubtthatthesaleofthelotspreferredbythemortgagorwouldbesufficienttodischargethedebtowedtotherelevantmortgageeandofanyothersecurityholderswhoseinterestthemortgageeisrequiredtoconsider,afailuretosellthepreferredlotsmaybreachthemortgageesdutytosellingoodfaith8.

    End notes

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

    2pars62-64

    3pars8590.4par925par1546par1597par1618par100

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