A registered proprietor ("Plaintiff") lodged caveats on 30 April 2010 to prevent registration of transfers pursuant to mortgagee sales. On 28 May 2010 ("First Proceedings") the Court held the caveats were invalid and the balance of convenience did not favour an extension of the caveats. The Court ordered the caveats be immediately removed to allow settlement to proceed as scheduled on 31 May 2010. The Plaintiff then lodged further caveats on 31 May 2010 preventing settlement. On 22 June 2010 ("Second Proceedings") the Court ordered these further caveats be removed.
In McCourt v National Australia Bank Limited  WASC 121 (28 May 2010), the Plaintiff lodged caveats over 2 properties in Dalkeith ("Properties") to prevent alleged improper mortgagee sales ("Caveats"). The Registrar on behalf of the Bank gave notice to the Plaintiff that the Caveats will lapse after 21 days (the equivalent NSW section is s74J Real Property Act 1900 NSW ("RPA")).
The Plaintiff sought a Court order to extend the Caveats. The Bank, as mortgagee, sought a Court order to remove the caveats to proceed with settlement of the mortgagee sales. The Plaintiff alleged the impending settlement was an improper exercise of the Bank's power of sale as the properties were selling for $250,000 under market value.
Caveatable interests and duty of mortgagees
Unlike the Transfer of Land Act 1893 (WA) ("TLA"), in NSW under s74F(2) RPA a registered proprietor fearing an improper dealing may lodge a caveat prohibiting the recording of any dealing on the title. To extend a caveat (in NSW after service of a lapsing notice), a caveator must demonstrate that there is a prima facie case, or a serious question to be tried, and that the balance of convenience favours an extension.
Murphy J held that the duty of a mortgagee exercising power of sale is to act in good faith, which embraces the notion that bona fide steps must be taken not to sacrifice the mortgagor's interest. The mortgagee is not bound to postpone the sale in the hope of obtaining a better price later. [Note: s420A Corporations Act 2001 (Cth) applies to corporate mortgagors; some states also have statutory duties imposed on mortgagee sales under land legislation].
His Honour explained that a mortgagees' duty is variable. The obligation on the mortgagee to consider the interests of the mortgagor proportionately increases depending on the probability of surplus funds being left over for the mortgagor after the mortgagee sale.
His Honour held the Caveats were invalid, the Caveats did not disclose a caveatable interest and the balance of convenience did not favour an extension of the Caveats. The Court ordered that the Caveats be immediately removed. Reasons provided include:
The language of the Caveats was defective as they failed to use proper wording to adequately describe the equitable interests. His Honour held that any allegation of bad faith should be expressed distinctly and positively, the Caveats being inadequately expressed in terms of 'possibilities' of bad faith.
His Honour also held:
The Plaintiff failed to allude to these matters in the Caveats. The Court also stated that the Caveats were invalid as they forbade any dealing with the properties whatsoever. Caveats in these circumstances should be worded to prevent registration of the improper transfer, not any dealing whatsoever.
No evidentiary basis
The Plaintiff failed to provide adequate evidence of bad faith. The Plaintiff should have provided the Court with current valuations to prove the 2 properties were selling for well below market value. The fact the sale occurred at auction indicates there was a reasonable testing of the market by the Bank.
Balance of convenience
The balance of convenience was in the Bank's favour. The Bank is foremost entitled to recover its debt. His Honour stated that:
The Court held any wrong could be vindicated by the Plaintiff suing the Bank for damages after settlement of the difference between the sale price and the alleged higher market value. Allegations the Bank had previously sold several other properties of the Plaintiff for less than market value did not assist the Plaintiff's case. The Court stated the Plaintiff had ample opportunity prior to commencing these proceedings to vindicate his complaints. Similarly, the Court held there would have been no surplus money available for the Plaintiff even if the properties sold for the price the Plaintiff alleges was proper.
In McCourt v National Australia Bank Ltd [No 2]  WASC 151 (22 June 2010), the Plaintiff lodged further caveats over the Properties ("Further Caveats") preventing settlement of the alleged improper mortgagee sales. The Bank sought a Court order to remove the Further Caveats, which was granted.
The Further Caveats did not have the deficiencies in caveat form identified by the Court in the First Proceedings and an undertaking as to damages was provided. The Court rejected the Plaintiff's interpretation of the TLA provisions and held the Further Caveats be removed pursuant to s138D TLA (the equivalent NSW section is s74O RPA). s74O RPA precludes lodgement of further caveats after a Court orders removal of previous caveats.
The Court explained that, even apart from proper interpretation of s138D TLA (in NSW, s74O RPA) pursuant to which the Plaintiff must lose, the Plaintiff also failed to prove the Further Caveats should remain on title based on equitable principles stated below:
The Plaintiff argued the Bank is estopped from relying on its 29 January 2010 default notice ("Default Notice") to sell the Properties, as the Default Notice was issued contrary to a prior arrangement made during a meeting on 23 September 2008 between the Bank and Plaintiff ("Meeting"). The Plaintiff argued he relied on representations made by the Bank during the Meeting that proceeds of sale of another property of the Plaintiff would be applied by the Bank in a particular way.
The Plaintiff relied on the equitable principle of estoppel expressed in Barns v Queensland National Bank Ltd  HCA 26: a mortgagee is estopped from relying on its strict legal rights under a mortgage if the parties have negotiated that the strict legal rights of the mortgagee will not be enforced (or will be partially enforced or enforced later), and the mortgagor having relied upon the mortgagee's representations, would suffer detriment if the mortgagee reneged on its representations. The Court held the facts did not prove estoppel.
The Plaintiff argued the mortgagee sales should be prevented as the Bank had exercised its power of sale in bad faith. The Court held there was no bad faith on the facts. The Court explained principles of bad faith, including if a 'serious blunder' occurs during a mortgagee sale causing a large diminution of the sale price, the mortgagee may be liable for damages even if the 'serious blunder' is by an agent such as the real estate agent. Similarly, the Court stated if the price obtained in a mortgagee sale is grossly below market value, that fact alone may evidence bad faith. However, merely obtaining a price below market value is usually insufficient to prove bad faith.
Balance of Convenience
The Court held that even if the Plaintiff had successfully proven estoppel or bad faith, the Further Caveats should be removed based on the balance of convenience. The Court stated the Plaintiff had delayed in making any objection to the Default Notice, having made no objection prior to lodging the Caveats. The Court reiterated there would be no surplus money available for the Plaintiff anyway. Also, the Further Caveats were only lodged on the day settlement was schedule to occur and were not on title at the time the purchasers bought the Properties at auction. The balance of convenience therefore favoured removal of the Further Caveats.
A registered proprietor seeking to prevent an improper mortgagee sale should ensure the caveat is properly drafted so it is not invalid on its terms. A registered proprietor should obtain current valuations and clear evidence of the mortgagee's bad faith in any application to extend a caveat on this basis.
These cases show Courts will not lightly prevent a mortgagee sale by extending a caveat for alleged bad faith. A registered proprietor will have a better chance of extending a caveat to prevent an improper sale if surplus funds would exist for the mortgagor after a proper sale. Also, Courts may maintain the first caveat on title (subsequent caveats are prevented by s74O RPA) preventing a mortgagee sale if a registered proprietor can prove estoppel or bad faith. Clear evidence is required to prove estoppel or bad faith and each case will depend on its particular facts. Courts will ultimately way up the balance of convenience between the parties.
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.