The price is wrong? The duty of good faith of a mortgagee in the midst of a pandemic - Charges, Mortgages, Indemnities

This week's TGIF considers recent comments in HSBC Bank Australia Ltd v Wang & Ors [2021] QSC 58 concerning a mortgagee's duty of good faith in periods of significant market uncertainty and what sales conditions may constitute a breach of the duty.

Key takeaways

An 'inadequate' sales price will not of itself demonstrate a lack of good faith. The mortgagee's conduct must be so unreasonable as to rise to the level of unconscionable conduct.
It was not necessary to extend the marketing period for the Queensland luxury property until interstate borders were reopened given the lack of evidence as to when that would occur.
In light of the uncertainty and significant market disruption last year as a result of the pandemic, the price offered and accepted for the property was better evidence of the property's market value than the valuations obtained by the respective parties.

What happened?

In a recent case before the Supreme Court of Queensland, Holmes CJ considered the mortgagee's duty of good faith to the mortgagor when exercising the power of sale in the context of the sale of a prestige property by a mortgagee during the peak of the pandemic for Australia.

In December 2019, the mortgagee, HSBC, obtained default judgment for recovery of possession of the mortgaged property. The mortgagee obtained a valuation and an estimate that the property would require a maximum of six to 12 months on the market to sell at market value.

In June 2020, a real estate agent was appointed and marketed the property extensively through their website, social media, local real estate publication and handouts provided at open houses and distributed locally.

An unsuccessful auction occurred in early August when state and international borders were closed, and, in September 2020, the mortgagee accepted a bid in the valuation range but significantly below the assessed market value.

Less than a week before settlement, the mortgagors lodged a caveat claiming an equitable interest in the property as registered proprietors on the ground that the mortgagee failed to act in good faith in the exercise of its power of sale by failing to properly market the property and for selling it at significant under value.

The mortgagee brought an application to remove the caveat – which required the Court to consider whether there was a serious question to be tried as to the breach of good faith claim.

What did the court find?

Breach of good faith

The Court summarised the mortgagee's duty of good faith in this context as requiring that the mortgagee not 'recklessly or wilfully sacrifice the interest of the mortgagor'. In this context 'recklessness' was taken to mean failing to take obvious precautions to ensure a fair sale price and being careless as to whether a fair price was obtained.

The Court noted that the mortgagee's representative had determined to accept the sale price despite it being under value on the basis of the prestige property market's uncertain long-term forecast, the offer being a significant improvement on the offer at the attempted auction, inspections of the property had produced no real interest from prospective buyers, and there had been "a good deal of negative feedback about some aspects of the property".

The Court also noted that despite there being valuations suggesting a much higher market value, in view of the significant market disruption that occurred last year, the price offered and accepted was better evidence of the property's market value than the valuations provided by the mortgagee and mortgagor's valuation experts respectively.

The registered proprietors argued that the mortgagee should have waited until borders were reopened between Queensland and the other states to enable a better price to be achieved. However the Court held that, at the time, there was no reason to suppose any improvement in the market was imminent, or that there would be a continuous reopening of Queensland's borders within the balance of 2020.

Despite one of the valuers recommending a longer marketing period to achieve a better sale price, the Court reaffirmed that a mortgagee is entitled to sell at the time of their choice without waiting for a time which the registered proprietor would consider favourable.

With regards to the duty of good faith, the Court ruled that the mere fact of a sale at an inadequate price does not demonstrate a lack of good faith. It is necessary to show that the mortgagee's failure to take reasonable steps to obtain a proper price was so serious as to be characterised as unconscionable conduct.

The Court ultimately ordered that the registered proprietor's caveat be removed to allow the mortgagee's sale to complete.

Comment

The Court's approach to weighing valuation evidence against the actual price achieved in a private treaty sale during periods of severe market uncertainty is instructive. It should be noted that in this case the offer accepted was significantly lower than the value ascribed to the property by the LVR in the mortgage initially granted to the mortgagee.

For a mortgagee to breach the duty of good faith their conduct will need to rise to the level of unconscionable conduct but does not need to show an actual intention to defraud or collusion with the purchaser.

Finally, it should be noted that the judgment comes in the context of the uncertainty in the property market created last year by the pandemic and the international and state border closures. The Court did not consider it necessary for sellers to have waited until interstate borders were open in light of that uncertainty.

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.