This week's TGIF considers a recent decision in the
Victorian Supreme Court in which a Guarantor was released from
liability as a consequence of the Lender's inappropriate
conduct in realising the security.
In late 2005 the Lender advanced $120,000 to the Borrower
secured against an existing mortgage over hotel/motel complex owned
by the Borrower. The loan was also secured by personal guarantees
given by the directors of the Borrower.
One of the directors (the Guarantor) sold his
interest in the Borrower in 2007 and requested to be released from
his guarantee, however, the Lender refused to do so.
By late 2010, the Borrower had defaulted and the Lender issued a
notice to pay.
Shortly after receipt of the notice to pay, the Borrower entered
into an 'arms-length' contract to sell the mortgaged
property for $3.5 million; enough to satisfy the debt owing
The Lender did not accept the Borrower's Contract and
elected to serve a Notice of Redirection of Rent on the lessees of
the mortgaged property, and thereby became mortgagee in possession
under its mortgage over the Borrower's property.
Despite the concern expressed by the Borrower and the clear
benefits of the Borrower's Contract, which would have resulted
in payment of the debt owed to the Lender in full, the Lender
maintained its position, declaring it would move to have the
property sold at a public auction.
Throughout late 2010 and early 2011 the Lender made no moves to
have the sale set in motion and by the time a valuation was
obtained in late March 2011, the value of the mortgaged property
had fallen to $2.5 million. The Lender subsequently attempted to
revive the Borrower's Contract but those attempt proved
In May 2013 the Lender negotiated a private sale at $2.8
million, without the involvement of a real estate agent, any
external advertising campaign and without a contemporary valuation
(Lender's Contract). Relevantly, the Lender
provided vendor finance and the Purchaser, who was also a
co-guarantor and former director of the Borrower, was released from
any ongoing liability.
Proceedings were commenced by the Lender against the Guarantor
for the shortfall.
The Courts decision
One of the issues to be determined was whether the Lender had
complied with its duties and obligations as mortgagee in possession
in the absence of a public marketing campaign and where the Lender
had instead entered into an 'unusual, generous and private'
deal in the form of the Lender's Contract.
The Guarantor contended that, despite terms in the Guarantee
which protected the Lender, he should be relieved from liability.
The Court agreed and the claim against him for the shortfall was
The actions of the Lender in refusing to uphold the
Borrower's Contract were found to have diminished the value of
the mortgaged property by at least $700,000 (being the difference
between the purchase price under the two contracts).
This case serves as a timely reminder to lenders that the right
to enforce a debt against a guarantor may be lost where the power
to sell is not exercised appropriately.
The interests of the guarantor and the debtor in the mortgaged
property should not be lightly disregarded. If a lender fails
implement a marketing and advertising strategy;
engage a selling agent to implement the strategy; and
obtain current valuations,
but instead enters into sale by private treaty with a party
related to the transaction, it does so at its own peril and bears a
real risk that it will be held in breach of its duty to act in good
In those circumstances the guarantor of the secured debt may be
entitled to show that any liability to the secured creditor should
be reduced or even extinguished.
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.
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