Following on from our January 2009 update ( click here to read) on the statutory duty of mortgagees to sell at market value, we report on the Real Property and Conveyancing Legislation Amendment Bill 2009 which is currently before the NSW State Parliament.
Among its various objects, the Bill purports to impose:
- additional identification requirements upon mortgagees when taking security
- a duty of care on mortgagees when exercising powers of sale on mortgages obtained from individuals.
Onus on mortgagees in relation to identification of mortgagors
The Bill sets out a new requirement to identify mortgagors before a mortgage is presented for registration. Mortgagees must take "reasonable steps" to confirm that the person executing the mortgage as mortgagor is the same person as the registered proprietor of the land that secures the loan to which the mortgage relates. It is proposed that the regulations will prescribe what constitutes "reasonable steps" and mortgagees that comply with the regulations will be taken to have discharged this obligation. However, mortgagees may elect to implement their own procedures for the identification of mortgagors.
In addition to the obligation to identify mortgagors, the Bill also requires mortgagees to keep:
- records of the steps taken to identify the mortgagor
- a copy of any document provided by the mortgagor to prove their identity.
These records must be kept for seven years after the date the mortgage is registered (or such other period as prescribed by the regulations), during which time the Registrar General may require mortgagees to produce the records and answer questions about the process undertaken to identify mortgagors.
Failure to comply with the new identification, record keeping and reporting requirements will mean that a mortgagee runs the risk of having its security cancelled by the Registrar-General, in circumstances involving fraud or where the mortgagee had actual or constructive knowledge that the individual executing the mortgage was not the registered proprietor of the land.
Mortgagees should also be aware that the proposed Bill prevents a mortgagee from claiming against the Torrens Assurance Fund where loss to a mortgagee arises from a failure to comply with the identification and record keeping requirements described above, or from the improper exercise of a power of sale, discussed below.
How can mortgagees take reasonable steps to identify a mortgagor?
Although it is proposed that the regulations to the Bill will set out the "reasonable steps" mortgagees may take to identify a mortgagor, not all mortgagees will elect to follow them. Mortgagees may already have sufficient identification and record-keeping procedures in place.
Mortgagees operating in other jurisdictions will be aware that in February 2006, the Land Titles Act in Queensland was amended to require mortgagees to take "reasonable steps" to identify the person(s) signing the mortgage as mortgagor, or risk losing indefeasibility of title.
In addition, mortgagees will be aware that the Anti-Money Laundering/Counter-Terrorism Financing Act (AML/CTF Act) imposes obligations on all lenders to identify customers and keep records when "making a loan in the course of carrying on a loans business" or when "allowing a borrower to conduct a transaction in respect of a loan made in the course of carrying on a loans business". Assuming the mortgagee is at least complying with the "minimum identification provisions" found in the AML/CTF Rules, and on the basis that the standard required by the regulations for the proposed Bill do not exceed those provisions, mortgagees may already have documented processes and procedures in place to address the mortgagor identification requirements of the proposed Bill.
Articles written by gadens lawyers in February 2006 ( click here to read update) provide guidance to mortgagees on what constitutes "reasonable steps" to identify a mortgagor.
Duty of care when exercising powers of sale
The Bill amends the Conveyancing Act 1919 (NSW) by stating that a mortgagee, when exercising a power of sale, must take reasonable care not to sell the mortgaged property for less than 'market value'. This proposed amendment effectively codifies the common law duty of care owed by mortgagees to act reasonably when seeking to enforce under their security.
As we have previously reported, when exercising a power of sale, mortgagees must take care to:
- take the property to market through the use of appropriate advertising
- seek the advice of agents to attract the largest number of potential buyers
- sell the property at an auction when possible
- obtain a written valuation before sale, especially where there is movement in the property market.
We note that this amendment bridges a gap in existing legislation by codifying this duty in circumstances when the mortgagor is an individual. Where the mortgagor is a corporate entity, the Corporations Act already imposes the duty not to sell below 'market value' on mortgagees exercising a power of sale.
In practical terms, this amendment may not alter the standard of care which the courts have previously required of mortgagees when exercising a power of sale. However, the introduction of the proposed statutory duty appears to reflect an increased focus on the conduct of lenders in carrying out mortgagee sales, by both regulators and the courts. We have recently seen courts show a desire to closely examine the way lenders market properties in determining whether to grant an injunction preventing a lender proceeding with a mortgagee sale.
Similar amendments to those contained in the proposed Bill that were recently introduced in Queensland went further, by prescribing in some detail what lenders must do to comply with their duty as mortgagee exercising a power of sale. Whilst lenders' obligations have not yet been detailed in this way in New South Wales, it is important for lenders to continue to pay close attention to the mortgagee sale process to ensure properties are appropriately marketed and advertised to achieve their proper market value.
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