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 1TURKSLEGALBackground 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|May2011Mortgagees- Youve got the Power!ExercisingtheMortgageespowerofsaleingoodfaith-howfardoesthedutyextend?AreaofExpertise|CommercialDisputes&InsolvencySummaryIna2009SupremeCourtofVictoriadecision,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,orwhetherthesaleofaparticularlotorlotswillbesufficienttosatisfythefullamountofthedebt1.2TURKALERTTURKSLEGALMortgagees- 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 LawSection77(1)ofthe TLA providesasfollows:Ifwithinonemonthaftertheserviceofsuchnoticeordemand orsuchotherperiodas isfixed insuchmortgageorchargethemortgagorgrantororotherpersonsdonotcomplywiththenoticeordemandthemortgageeorannuitantmay,ingoodfaithandhavingregardtotheinterestsofthemortgagorgrantororotherpersons,sellorconcurwithanyotherpersoninsellingthemortgagedorchargedlandoranypartthereof,togetherorinlots,bypublicauctionorbyprivatecontract,atoneorseveraltimes,andforasumpayableinoneamountorbyinstalments,subjecttosuchtermsandconditionsasthemortgageeorannuitantthinksfit...The Issues on AppealThecentralissueconcernedthescopeofthedutyowedbyMBFtoMrNolanunders77(1)oftheTLA,andwhetherMBFbreachedsuchdutybysellingtheresidentialhomeonLot1immediatelyafterthesaleofLot2,whenithadalreadyrecoveredmostofthedebtsecuredbyitsmortgagebysellingLot2and,whetheritwouldhaverecoveredthebalanceofitsdebtifithadinsteadsoldLot3next.TheCourtofAppealconsideredthefollowingissues:(a) Isthescopeofthemortgageesdutyunders77(1)ofthe TLA tosellingoodfaithandhavingregardtotheinterestsofthemortgagorlimitedtotakingreasonablestepstoobtainthebestpricefortheproperty?Doesitrequireamortgageetohaveregardtoahomeoccupationinterest?(b) HavingregardtotheadvicewhichMBFreceivedbothpriortoandduringthecourseoftheauction,didMBFbreachthedutyitowedtoMrNolanunders77(1)oftheTLA?The Decision on AppealInrelationtotheissueofwhetherahomeoccupationrightexisted,JusticesNeave,RedlichandWeinbergstatedthat:ItisclearthatMrNolanhadanequitablerighttohavethelandrestoredifherepaidthedebt.Hecouldhavepreventedthesalefromproceedingifhehadtakenthestepsdescribed...Butthatrightisnotarightofhomeoccupation...Therightofrestorationonpaymentappliestoallmortgagedpropertyandisnotconfinedtopropertyusedforahome.Further,theexerciseoftherightdependsonthemortgagorbeingabletorepaytheamountowingtothemortgageeor intocourt.IthadnorelevancetoMrNolansclaimunlesshepaidtheamountthenowingtoMBF3TURKALERTTURKSLEGALMortgagees- Youve got the Power!Exercising the Mortgagees power of sale in good faith - how far does the duty extend? by Susan SumarsMrNolandidnothaveahomeoccupationrightofthekindidentifiedbyhisHonour2Inrelationtothenatureofthemortgageesdutyunders77(1),theirHonoursstatedthat:Inthiscase,thereisnodoubtthatMBFobtainedaproperprice(indeedaverygoodprice)onthesaleoftheproperty.However,MrNolanseekstoupholdthetrialjudgesdecisionthatMBFwilfullydisregardedhisinterestinretainingLot1andactedmanifestlyunreasonabl[y].WedonotconsiderthatamortgageesdutytoactingoodfaithandhavingregardtotheinterestsofthemortgagorisconfinedtotakingreasonablestepstoobtainthebestpriceconsistentwithitsentitlementtorealiseitssecurityHowever,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.4TURKALERTTURKSLEGALMortgagees- Youve got the Power!Exercising the Mortgagees power of sale in good faith - how far does the duty extend? by Susan SumarsImplicationsTosummarisetheposition:(a) amortgageeisnotatrusteeofthepowerofsale,whichisgiventothemortgageetoenabletherealisationofthesecurityinterest;(b) amortgageemustactingoodfaith,thatisconscionably,andcannotsellforapurposeotherthanthatforwhichthepowerofsaleisconferred;(c) amortgageeisnotrequiredtoplacetheinterestsofthemortgagorabovethemortgageesinterestsinrecoveringthedebt.Forexample,themortgageecansellthepropertyatatimeofthemortgageeschoice,eventhoughthepropertymightrealiseahigherpriceifthesalewerepostponed;(d) themortgageecannotdisregardtheinterestsofthemortgagorbysimplysellingforapricewhichwillcovertheamountoftheloan.TheMortgageemusttakereasonablestepstoobtainthebestpriceconsistentlywithitsrighttoenforceitssecurityinterest.Thisrequiresthemortgageetoconsiderhowthepropertyshouldbeadvertisedandtoallowanappropriatetimebetweentheadvertisementandthesale;(e) themortgageemustalsohaveregardtotheinterestsofsubsequentsecurityholders;and(f ) ifthereisnodoubtthatthesaleofthelotspreferredbythemortgagorwouldbesufficienttodischargethedebtowedtotherelevantmortgageeandofanyothersecurityholderswhoseinterestthemortgageeisrequiredtoconsider,afailuretosellthepreferredlotsmaybreachthemortgageesdutytosellingoodfaith8.End notes1MBF Investments Pty Ltd v Nolan [2011] VSCA 114atpar90.Allotherparagraphnumbersinfootnotesrefertothisjudgment.2pars62-643pars8590.4par925par1546par1597par1618par100Sydney|Level29,AngelPlace,123PittStreet,Sydney,NSW2000|T:0282575700|F:0292390922Melbourne|Level10(NorthTower)459CollinsStreet,Melbourne,VIC3000|T:0386005000|F:0386005099Insurance & Financial Services | Commercial Disputes | Workers Compensation | Business & Propertywww.turkslegal.com.auThis TurkAler t i s current at i ts date of publ icat ion. Whi le every care has been taken in the preparat ion of this TurkAler t i t does notconst i tute legal advice andshouldnot bere l ieduponfor this purpose. Speci f ic legal advice shouldbesought onpar t icular matters.TurksLegal does not accept responsibi l i ty for any errors in or omiss ions f rom this TurkAler t . This TurkAler t i s copyr ight and no par tmaybereproduced in any formwithout thepermiss ionof TurksLegal . For anyenquir ies, p leasecontact theauthor of th is TurkAler t .TurksLegal 2010Mortgagees- Youve got the Power!Exercising the Mortgagees power of sale in good faith - how far does the duty extend?by Susan SumarsFor more information, please contact: SusanSumarsLawyerT:0386005137susan.sumars@turkslegal.com.au