The October 2008 decision of the Queensland Supreme Court in
Sablebrook provides guidance for mortgagees when exercising a power
of sale upon default by a mortgagor. The use of valuations and the
consideration of market trends by mortgagees are considered by
courts when determining reasonableness.
The mortgagee sold the property to the neighbouring body
corporate for $240,000 in April 2003. The land had been valued in
December 2002 at $225,000.
The mortgagee did not engage local agents nor did it seek an
opinion or an updated valuation as to the land's value. The
December 2002 valuation did not discuss market trends.
Did the mortgagee act reasonably in selling the property when
relying on the December 2002 valuation in circumstances where it
had no knowledge of market trends in the relevant area or of the
extent of any potential increase in value?
The court found that the failure to obtain an updated valuation
meant that the mortgagee had not exercised reasonable care to
ensure that the property was sold at market value.
In particular the mortgagee:
had no knowledge of market trends or the market value of the
property at the time of sale and had sought out no reliable
information concerning these matters;
sold the property privately and without proper advertising
(failing to attract the largest number of potential buyers);
took no steps to determine whether it was obtaining market
value for the property.
In these uncertain economic times mortgagees should take care
take the property to market through the use of appropriate
advertising and seek the advice of agents to attract the largest
number of potential buyers;
sell the property at an auction when possible; and
obtain a written valuation before sale especially where there
is movement in the property market.
Indefeasibility Of Title
The October 2008 Federal Court decision of Haslam highlights the
need for lenders to carefully check the conditions of any pre
existing lease arrangements before taking a mortgage as security
Several retirees sold their homes to corporate purchasers on
terms which guaranteed them monthly payments and the right to
occupy their homes for the remainder of their lives or until the
property was vacant for more than 6 months.
The "right to occupy" was not noted on the title by
way of a registered lease, however the lender knew that the homes
were tenanted (or at the very least should have known). The
purchasers borrowed money to finance the acquisitions secured by
registered mortgages over the properties. Default followed and the
mortgagee sought to exercise its rights under the mortgages.
Did the mortgagee have to enforce subject to the unregistered
leases (being the retiree's equitable interest as
The court found that the unregistered leases took priority as
they fell under an exception to the rule of indefeasibility. The
general position at law is that a mortgagee who takes a mortgage
with notice of a tenancy will take the mortgage subject to the
terms of the tenancy. In this case, the mortgagee failed to make
appropriate enquiries to its own detriment.
The retirees were entitled to specific performance of the
contracts for sale and were found to have an equitable interest in
the properties, retaining possession of the property as tenants.
This clearly has a major impact on the value of the property.
Mortgagees need to understand the terms of any pre existing
leases or entitlement to possession of the property. While a
registered interest will usually prevail, there are circumstances
where it will not. Turning a blind eye to potential issues often
does not protect a mortgagee from aspects of a transaction that
would have been discovered on appropriate enquiry. This case
reminds mortgagees that now is a good time to review
mortgagees' appetite for risk, and to re-assess due diligence
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