Australia: Changes To Mortgagee´s Duties When Exercising Right Of Sale

The Queensland Parliament yesterday, by way of an urgent bill, introduced amendments to the Property Law Act 1974 (Qld) (PLA) in the form of the Property Law (Mortgagor Protection) Amendment Bill.

The new legislation amends section 85¹ of the PLA, which relates to a mortgagee's duties as to sale price when exercising their right of sale.

Reasons for the amendments

Attorney General and Minister for Justice, the Honourable Kerry Shine, in his second reading speech commented that the introduction of the amendments were a result of "the current global economic and financial circumstances" and that "the purpose of [the] bill is to strengthen the protections for mortgagors when mortgagees exercise such powers [referring to the power of sale]."

The passage of this legislation follows the recent decision of Justice Applegarth in Sablebrook Pty Ltd v Credit Union Australia Ltd², where his Honour found that the mortgagee had breached its duty where it had accepted an offer for the sale of the property which was higher than the valuation it had obtained 4 months previously. This case was a timely reminder of the importance of obtaining reliable evidence of the property's value prior to exercising the power of sale.

Section 85 PLA

Prior to the amendments, section 85 the PLA required the mortgagee to "take reasonable care to ensure the property is sold at market value." A significant body of case law has been developed surrounding this section and as to how a mortgagee could be shown to have exercised reasonable care when exercising the power of sale.

In introducing the amendments it has not been stated how or why section 85 was deficient.

It is suggested that the recent amendments simply reflect the case law and the most significant implication of these amendments are the addition of the penalty provisions.

Summary of the Amendments

The amendments expressly extend the statutory duty of the mortgagee exercising the power of sale under all mortgages to situations where property is sold by a receiver under a delegated power or by the mortgagee as attorney for the mortgagor.

The amendments specify the steps which a mortgagee of a "prescribed mortgage" must follow to satisfy that duty, and penalise breaches.

The following subsection will be inserted as subsection (1A):

"Also, if the mortgage is a prescribed mortgage, the duty imposed by subsection (1) includes that a mortgagee or receiver must, unless the mortgagee or receiver has a reasonable excuse—

• adequately advertise the sale;

• obtain reliable evidence of the property's value;

• maintain the property, including by undertaking any reasonable repairs;

• sell the property by auction, unless it is appropriate to sell it in another way; and

• do anything else prescribed under a regulation.

"Prescribed mortgage" is defined in the section to mean "a mortgage of a kind prescribed under a regulation." There is no further definition offered in the legislation. However, during the debate surrounding the amendments Mr Shine suggested that it is intended that the amendments are to "capture mortgages over land of a consumer credit nature such as owner-occupier home loans .... However, [the definition] needs to be flexible to respond to emerging concepts as to the scope of consumer credit."

The amendments create an offence for a mortgagee under a "prescribed mortgage" for failing to follow the stated steps. This penalty is $2,000.00 for failing to do anything prescribed under a regulation and is $20,000.00 otherwise.

The amendments provide that where a mortgagee has a "reasonable excuse" then it may not be necessary for a mortgagee to undertake one of the outlined steps.

The meaning of "reasonable excuse" is unclear. The previous case law may offer some guidance in this regard, for example in the past it was considered reasonable for a mortgagee to rely upon a previous marketing campaign so as to be able to show that further marketing by a mortgagee was unnecessary.

Commencement

The amendments insert Part 21 which includes transitional provisions for the amendments to apply to mortgages whether made before or after commencement. However the section does not apply to a mortgagee or receiver if, immediately before the commencement, the mortgagee was entitled to exercise the power of sale and was not prevented from doing so by section 84(1) of the PLA.

The amendments will come into effect by proclamation. No date for commencement has been set at this time.

Conclusion

The combination of these amendments and the recent Supreme Court of Queensland decision should act as a timely reminder to all mortgagees to ensure that, when exercising the power of sale, all reasonable steps are undertaken to get the best possible sale price for a mortgaged property.

Deacons' experienced insolvency and restructuring team can advise you on the necessary steps to ensure you get the highest return on your mortgaged property. For advice on the amendments and how they will affect you, please contact Damien Butler or Peter Schmidt.

Footnotes

1 The word "The" has also been amended from section 89 of the PLA.

2 [2008] QSC 242.

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.