Australia: Mortgagor Protection: Amendments To The Property Law Act

Mortgagees in Queensland exercising their power of sale will be required to comply with new rules following the passage of the Property Law (Mortgagor Protection) Amendment Act 2008 last week. In particular, the provisions dealing with a mortgagee's duty to take reasonable care to ensure the property is sold at market value have been strengthened.

The amendments

The Act makes three major changes to the current mortgagee power of sale arrangements in the Property Law Act 1975 (Qld) (PLA), as follows:

  • it creates the new concept of a "Prescribed Mortgage";
  • it extends the mortgagee's duty to exercise reasonable care to receivers and attorneys; and
  • it imposes specific duties on mortgagees exercising power of sale in certain circumstances.

Prescribed mortgages

The Act imposes specific duties on a mortgagee's exercise of a power of sale in connection with a "Prescribed Mortgage".

A "Prescribed Mortgage" is a mortgage of a kind prescribed under a regulation. While the new regulations have not yet been passed, the Explanatory Memorandum indicates that the definition of "Prescribed Mortgage" will capture mortgages of a consumer credit nature.

In our view, these amendments will potentially create a two-tier regime, where certain mortgages securing consumer credit will become "Prescribed Mortgages" under the Regulations and be subject to specific additional legislative requirements during enforcement.

Extension to receivers and others

The Act extends the section 85 duty to take reasonable care to obtain market value to attorneys for the mortgagee and receivers acting under a delegated power. The duty under section 85 of the PLA to exercise reasonable care formerly applied only to mortgagees and their agents.

Under the general law, a receiver is not an agent of the mortgagee but is an agent of the mortgagor.

As a result, prior to the recent amendments there was nothing under Queensland law imposing a statutory duty to attempt to obtain market price imposed on receivers beyond general law duties to act in good faith and without carelessness and specific duties under the Corporations Act with respect to the property of Corporations.

The Act changes the existing position that a receiver is not liable under the statutory duties as to selling price.

The Act now provides that receivers are under the same obligations as mortgagees. Further, receivers may now be subject to fines for failure to comply with parts of the Act. Ultimately, given that a breach of the new Prescribed Mortgage regime is quasi-criminal in nature and a breach of the general duties as to selling price is unlawful, repeated breaches of either or both limbs may be a particular factor for a court to consider with regard to the regulation of insolvency practitioners.

Ultimately, the practical significance of this amendment is diminished because receivers appointed to the property of corporations are already covered by section 420A of the Corporations Act which provides a receiver must in selling property of a company take all reasonable steps to ensure market value is obtained.

The difference in wording between section 420A of the Corporations Act and section 85 of the PLA is the use of the words "all reasonable steps" in the Corporations Act. Practically, the steps required by both sections are similar (except with regard to Prescribed Mortgages.)

The only extension of a receiver's duty is in relation to appointments of receivers in Queensland to partnerships, individuals and other bodies not covered by the Corporations Act.

Specific duties

Previously, with respect to mortgages in general, a mortgagee was only obliged to take reasonable steps to ensure market value was obtained. The steps taken by a mortgagee were left to its discretion. While the Act does not alter this duty, it requires a mortgagee or receiver to take specific steps in relation to Prescribed Mortgages, namely to:

  • 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.

At first glance, the additional duties imposed by the Act seem to be no more than the steps a prudent mortgagee would ordinarily take to comply with their existing obligation to exercise reasonable care to obtain market value. Therefore, it is unclear whether Parliament intends to impose a more onerous duty through codification of such steps, or merely allow for penalties for any failure to take such steps in connection with Prescribed Mortgages, rather than relying on redress by way of traditional forms of civil liability for failure to take reasonable care. It is also uncertain what are "adequate" steps taken to advertise the sale, or how "reliable" evidence of a property's value will be construed. However, it may be that "adequate" advertisement means no more than that required to obtain market value, and that a valuation from a registered valuer would be considered "reliable". It is hoped that Parliament will provide further clarification on this point in due course.

A breach of the new section 85(1A) attracts a penalty of $20,000, unless the contravention relates only to something prescribed by regulation, in which case the penalty is $2,000.

According to the Explanatory Memorandum, the power to make regulations is intended to allow the provision to respond to emerging concepts relating to mortgages securing consumer credit. Mortgagees will need to stay alert to the possibility of Regulations passed by Parliament under section 85(1A) which may impose further duties on them.

The Explanatory Memorandum indicates that there had been no public or stakeholder consultation on the proposed amendments prior to enactment.

Transitional provisions

Section 352 contains the Act's relevant transitional provisions. It provides that the amendments to section 85 have retrospective application, applying to mortgages whether they were made before or after the commencement of the Act.

However, the new section 85(1A) does not apply if, before the commencement of the Act, the mortgagee or receiver was entitled to immediately exercise their power of sale.

We suggest that mortgagees should review their existing mortgagee sale processes to determine if they meet section 85(1A)'s requirements, pending Parliament's release of its definition of "Prescribed Mortgages".

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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