Like most pieces of legislation, the passing of the Real Property and Conveyancing Legislation Amendment Act 2009 (NSW) (Act) occurred without much (if any) fanfare. It was heralded as:
We focus here on the issues with respect to the duties of mortgagees (although the duties will also apply to chargees, in certain circumstances).
As stated in the New South Wales Parliament in Barry Collier's 'Agreement in Principle' Speech and in The Honourable Penny Sharpe's 'Second Reading' Speech, the Act sought to remedy:
This situation is more commonly referred to as a 'fire sale' or a 'cut and run sale'. An inappropriate approach to the sale of property in these circumstances can impact, and has impacted, upon valuers who have been sued for negligence arising from their valuation of property as part of a mortgage transaction.
Although the Act received assent on 13 May 2009, that portion of the Act dealing with the duties of mortgagees did not actually commence until 1 November 2011. The commencement of this portion of the Act had the effect of inserting section 111A into the Conveyancing Act 1919 (NSW).
Section 111A (which is contained in New South Wales legislation) imposes a statutory duty of care on mortgagees (including in respect of mortgages pursuant to the Real Property Act 1900 (NSW)) when exercising a power of sale in respect of mortgaged land. The content of this duty is to take all reasonable care to ensure that the property is sold for not less than its market value at the time of the sale or, in any other case (such as where market value cannot be properly determined), the best price that may reasonably be obtained in the circumstances.
Section 111A is therefore similar to:
- The recent amendments to section 85 of the Property Law Act 1974 (Qld) in Queensland as a result of the Property Law (Mortgage Protection) Amendment Act 2008 (Qld).
- The proposed insertion of section 59A into the Property Law Act 1969 (WA) in Western Australia as a result of the Property Law (Mortgagee's Power of Sale) Amendment Bill 2009 (WA).
Section 111A is also akin to section 420A of the Corporations Act 2001 (Cth) that imposes a similar obligation where the property of a corporation is sold by a 'controller' (which can include a mortgagee). Section 111A therefore attempts to remove any differences between the statutory obligations of mortgagees when selling property owned by a corporation or an individual. It is suggested that Courts required to consider the operation of section 111A will find guidance from the previous judicial consideration of section 420A of the Corporations Act 2001 (Cth).
Section 111A cannot be contracted out of (that is, it will apply notwithstanding any stipulation to the contrary) and provides that the duty of care applies to an agent appointed by a mortgagee to sell the mortgaged property in the same way as it applies to a mortgagee exercising a power of sale in respect of mortgaged property.
In addition, section 111A provides that the title of the purchaser cannot be challenged on the ground that the mortgagee has breached the duty imposed by this section, but a person who suffers loss or damage as a result of the breach can seek damages against the mortgagee. For example, where a mortgagee exercises its power of sale and unreasonably sells a property with a market value of $1.5 million for $1 million in order to 'quickly and cheaply' recover an outstanding loan amount of $1 million, the mortgagor may be able to seek damages against the mortgagee for the loss of around $500,000 - that being the amount that would have been remitted to the mortgagor upon settlement had the property sold at market value. In that light, section 111A does not affect the operation of any rule of law in New South Wales relating to the duty of the mortgagee to account to the mortgagor.
Section 111A only applies to sales of property arising as a consequence of a default occurring after 1 November 2011, yet regardless of when the mortgage was created. There will therefore be a slight 'lag time' until the Courts have an opportunity to consider, interpret and provide further guidance on the operation of this section. No doubt, that will be a matter for future editions of this journal.
Overall, section 111A seeks to clarify the uncertainty that has existed in New South Wales regarding whether a duty of care is owed by a mortgagee when exercising its power of sale and, if so, what the content of that duty of care is. That uncertainty has been a result of different Courts in different jurisdictions taking different approaches to the issue. It will therefore be interesting to see whether there is an increase in claims made against mortgagees for alleged breaches of this express statutory duty.
Now may be an opportune time for mortgagees to assess whether their procedures regarding the exercising of a power of sale comply with the newly prescribed statutory requirements. Naturally, this will include those procedures with respect to obtaining detailed and precise (independent and impartial) advice (from valuers) as to the market value of the property and the appropriate manner and method of conducting the sale (including marketing/advertising methods and time periods, terms and conditions of sale, price guides/reserves, etc). Obviously, a valuer's involvement in this process could potentially give rise to liability if the valuation is negligent.
Although a determination of whether a mortgagee exercising its power of sale has sold mortgaged property below market value will always depend on the facts and circumstances of each individual case, in our opinion, where a mortgagee has acted reasonably and in good faith with respect to the sale of a property, including by acting on the advice of reputable industry professionals such as valuers, a mortgagor will be hard pressed to succeed in a claim for damages given that such a sale would seem to be prima facie evidence of market value.
Whilst there may also be a question as to how the Courts will interpret the phrase 'market value' (given that it is not defined in the Conveyancing Act 1919 (NSW)), we suggest that it will be along the lines of that outlined in:
1. Spencer v The Commonwealth of Australia (1907) 5 CLR 418, as per Griffith CJ at page 432 and Isaacs J at 441
... the test of value of land is to be determined, not by inquiring what price a man desiring to sell could have obtained for it on a given day, i.e. whether there was, in fact, on that day a willing buyer, but by inquiring: What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell? ...
2.The Australian Property Institute's guidelines:
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