Gadens National Financial Services Recovery Quarterly Update - Part 1

Contents

• Changes For Mortgagees Exercising Power Of Sale And Dealing With Tenants

• Success: Gadens Prevents Last Minute Attempt To Restrain Auction

Changes For Mortgagees Exercising Power Of Sale And Dealing With Tenants

Introduction

Banks and financiers should be aware of recent legislation in Queensland which has changed the mortgagee sale landscape. The Qld Parliament has passed amendments to section 85 of the Property Law Act 1974 (Qld) ( PLA ), and the Residential Tenancies and Rooming Accommodation Act 2008 (Qld)was introduced which will ultimately replace the Residential Tenancies Act 1994 (Qld) ( RTA).

Amendments to PLA

The amendments to the PLA came into effect on 12 December 2008 and extend the obligations of a mortgagee to use reasonable care to obtain market value to receivers of all forms of property. Additionally, the amendments also impose a penalty where mortgagees and receivers fail to adhere to certain conduct.

The new section 85(1A) states that the duty under Section 85(1) for a mortgagee or receiver under a prescribed mortgage must, unless the mortgagee or receiver has a reasonable excuse include the following:

1. adequately advertise the sale;
2. obtain reliable evidence of the property's value;
3. maintain the property, including by undertaking any reasonable repairs;
4. sell the property by auction, unless it is appropriate to sell it in another way;
5. do anything else prescribed under a "regulation."

The new legislation imposes a maximum penalty of 200 penalty units where a breach in paragraph (a) to (d) occurs, which at this point equates to $20,000.¹

The term "prescribed mortgage" has been defined as a mortgage over residential land and the mortgagor's home is on the land. The definition stipulates that it does not matter if the residence is also used for a business purpose if the residence is primarily used as the mortgagor's home.²

The legislation does not make any significant changes to the standards regularly undertaken by prudent mortgagees in exercising their powers of sale. One change, however, is that it now imposes a more onerous obligation upon receivers of non-corporate property who were previously not subject to the PLA when exercising a power of sale.³ The amendments also ensure that any obligations upon a receiver of corporate property under the Corporations Act 2001 (Cth) are not affected.⁴

The changes do not effect mortgagees or receivers where the power to sell had arisen before 12 December 2008.

The areas where there is some potential change for mortgagees are briefly considered.

Maintain the property

This is one element where there is room for debate. A mortgagee before the amendments was not obliged to make expenditure to improve a property, but it may be reasonable to incur some expenditure to maintain the upkeep of a property. A mortgagee has often incurred expenditure if an increased return can be expected in the sale price.

After the amendments, mortgagees may now be expected to monitor the upkeep of property with greater diligence. Aesthetics may become a means for new arguments by mortgagors, and their lawyers, about increased returns being achieved by making reasonable repairs.

Sale by auction unless appropriate to sell in another way

Although sale by auction is the most common form of obtaining market value, there are circumstances where it is appropriate for mortgagees or receivers to sell in other ways (e.g. tender, open listing). The mortgagee will need to prove that was appropriate to sell in another way than auction.

The real question is whether a mortgagee can only "sell" by auction. This is an area where there might be some debate.

Reasonable excuse

The term "reasonable excuse" is not explained in the legislation, and is unclear. The onus is cast upon a mortgagee or receiver to prove reasonable excuse.

For instance, would a reasonable excuse include monetary considerations if a mortgagee seeks to save on sale costs where there is likely to be a residual debt in any event, and the mortgagee does not propose to pursue a mortgagor or guarantor for a residual debt?.

In our view, as the new amendments are designed as conduct provisions, monetary considerations do not constitute reasonable excuse. Instead, reasonable excuse is likely to constitute circumstances beyond the control of a mortgagee.

Residential Tenancies and Rooming Accommodation Act 2008

This Act was passed on 2 December 2008 and will commence on 1 July 2009. The RTA will continue to apply until 30 June 2009.

Whilst the changes are extensive, the amendment that is the most relevant to a mortgagee is the notice period to be given under to a tenant.

Under the RTA, where a mortgagee had not consented to a lease or tenancy, it had to give 28 days' notice to a tenant that it required possession of the property.

Under the new legislation a mortgagee who has not consented to a lease or tenancy must now give 2 months' notice. A mortgagee will not be able to obtain possession of the property unless this notice period is given. This could add further delays to the mortgagee sale process in Queensland where residential properties are tenanted. Mortgagees will need to obtain advice on their processes to take into account this change.

Success: Gadens Prevents Last Minute Attempt To Restrain Auction

Re: Gonfanon Pty Ltd v Perpetual Trustees Australia Limited [2008] NSWSC 1422

In the week before Christmas our Sydney office successfully defended an urgent application by a borrower to restrain our client (the mortgagee) from proceeding with an auction of the security property.

The auction was scheduled for Saturday, 20 December 2008.

At 6:30pm on Friday, 19 December 2008, one of the Sydney Partners appeared before the Duty Judge in the Supreme Court where the borrower, by its director, was seeking an injunction to restrain the auction from proceeding the next day.

The borrower claimed:

• the property had not been sufficiently advertised by the mortgagee;

• it held conditional refinance approval for the full mortgage debt; and

• the mortgagee's position would not be adversely affected by granting the injunction.

The borrower relied heavily on the argument that because the marketing process for the sale of the property had been insufficient, the property would be sacrificed if the auction was allowed to proceed.

We contended

• advertising had been ample and in keeping with industry standards (evidence of which was obtained from the real estate agent during a short adjournment);

• the reserve price for the auction exceeded the value of the property based on a recent valuation;

• given the number of caveats on title, any refinance was unlikely to repay all creditors; and

• any further delays would adversely affect the mortgagee, and possibly the borrower, in that the property was likely to decrease in value in the current market increasing the likelihood of a shortfall.

Judgment

In giving judgment the Duty Judge described the advertising of the property as "iffy".

However, the Judge was ultimately satisfied that as the mortgagee had set a reserve price which exceeded the market value of the property, any sale would not sacrifice the interests of the mortgagor.

Accordingly, the court allowed the auction to proceed the following day.

Caution when disclosing the reserve

A key factor which turned the decision in the mortgagee's favour was the court's finding that the reserve was consistent with the property's market value.

It is important however that the reserve not be disclosed in open court, as this could potentially prejudice the auction.

The court kept the reserve price confidential in its reasons for judgment.

Focus by court on equitable duty of mortgagees

When hearing the case the court noted its concern as to whether the mortgagee's equitable duty to properly advertise the mortgagee sale had been discharged.

In particular, the court was concerned that the advertising program:

• did not involve a wider publication; and

• was part of only a three week advertising program, when at least 4 weeks would have been preferable.

Despite the mortgagee's success in persuading the court that an injunction should not be granted, the case sounds a warning of the court's preparedness to entertain last minute injunction applications, simply because the mortgagee's advertising may not have been perfect.

Lessons learnt

There are lessons for all of us to learn, and in particular to minimise the prospects of a successful injunction being obtained to halt an auction going ahead, mortgagees should look to:

1. advertise in major publications;
2. conduct at least a four (4) week marketing campaign; and
3. set a reserve prudentially, by close reference to recently obtained valuation evidence.

Footnotes

1. A penalty unit is $100 under section 5 of the Penalties and Sentences Act 1992 (Qld).

2. Section 4 Property Law Regulation 2003.

3. The duty was to act in good faith and not to wilfully or recklessly sacrifice the mortgagor's interests.

4. New sub-section (8).

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.