Mortgagees and receivers and managers often face a difficult task when exercising rights to sell secured property or assets. A recent Court of Appeal decision has again highlighted some of the difficulties that can arise and the financial consequences that can result if a judge thinks it was done incorrectly.
The Court of Appeal's decision has rejected a mortgagee's appeal against a finding that it breached its duties when exercising its power of sale.
The duties on mortgagees and receivers are set out in various conveyancing legislation as well as in the Corporations Act 2001 (the Act) and are largely the same. For example, section 420A(1) of the Act provides:
"In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
- if, when it is sold, it has a market value – not less than that market value; or
- otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold."
In Glodale Pty Limited & Ors v Investec Bank (Australia) Limited (2007) the Judge found that the mortgagee had failed to properly fulfil its power of sale duties and awarded damages of A$2,714,250 against the mortgagee. The mortgagee appealed the decision.
Two important aspects of the mortgagee's duty, when exercising its power of sale were considered by the Court of Appeal.
1. Selling The Mortgaged Property In One Line
The mortgaged property consisted of two apartment complexes in Port Douglas, Queensland. Rather than taking steps to sell the apartments individually, the mortgagee decided to sell each complex in its entirety (or "in one line"). The mortgagee was able to point to a number of reasons why it took this course and the trial judge ultimately agreed that in this case a sale in one line was an acceptable method of sale.
The Court of Appeal agreed, noting in particular, that the sale in one line was appropriate given the loan had been in default for sometime, substantial interest continued to accrue (and would keep accruing during the longer period necessary for individual sales) and the owners had previously been unsuccessful at selling the apartments individually.
2. Breach Of Duty
On the basis that a sale in one line was allowed, the second issue considered was whether the mortgagee breached its duty in exercising its power of sale.
The trial judge had identified two deficiencies in the sale process. First, the mortgagee failed to retain a local Port Douglas agent for the sale. The mortgagee had retained a Melbourne based agent (with no experience in the Port Douglas market) who in turn retained a Cairns based agent to conduct the sale. The evidence established that Cairns and Port Douglas were separate markets with different agents servicing the two areas. Although the mortgagee argued that a local agent was not required for a sale in one line, the Court of Appeal disagreed and affirmed the views of the trial judge.
The second breach by the mortgagee related to the information provided in the tender documents and the way the properties were presented for sale. Among other things, the tender documents described the properties as having a "troubled history" and that the fire safety at the properties was "high risk" without adequate further explanation. The trial judge considered such comments painted an unnecessarily dim view of the properties. The judge was also critical of the mortgagees closing certain rooms in the apartments because the planning requirements did not allow those rooms to be used as bedrooms and presumably the mortgagee did not want to confuse potential purchasers. The Court appeared to be of the view that the more appropriate course was to leave the rooms open but explain the planning issue.
Given the Court of Appeal had already found a breach of duty based on the failure to retain a Port Douglas agent, it did not make any findings on this further breach but the Court appeared to support a number of the trial judge's comments.
3. Implications
It is often difficult to draw general principles from cases relating to the exercise of a power of sale given they almost always turn on their own specific facts. If nothing else, this case confirms the importance of engaging appropriately qualified agents for sale.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
