mortgagees - youve got the power!
DESCRIPTION
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.TRANSCRIPT
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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