The devil is in the detail for lender obligations.
Following a global trend, non-bank lending is fast becoming a mainstream choice in the Australian property market. According to PEXA's annual Property and Mortgage Insights report, non-bank lenders currently account for 10% of the country's commercial real estate lending market and are expected to increase by approximately 10% each year through to 2024.1 While the growth in non-bank lending is being welcomed by property industry participants, the property market has been through a sustained upward cycle and, with economic headwinds predicted, all lenders (both banks and non-banks) need to ensure they understand their statutory obligations should they need to enforce on their security.
Among the most important are those found within Section 420A of the Corporations Act. The legislation outlines the obligations faced by a lender or its appointed controller (receiver or agent for the mortgagee in possession) when enforcing on its security following a default and selling a property. On first reading, these obligations may appear simple. However, the legislation is not prescriptive on this matter. The devil here is in the finer details, determined through interpretation of the legal principle, which are tripping up a rising number of those new to the lending community.
It may come as a surprise to some, for instance, that regardless of whether a final sale price satisfies all parties involved, a debtor may still be able to sue their lender for not following a particular process, dependent on the circumstances. In other words, there is no step-by-step process to follow, no checklist to point to if problems arise after a sale is over. Section 420A allows that different property characteristics demand different methods of sale, and the law views each case holistically and in isolation. The courts will consider whether the steps the lender, or their controller, took were reasonable and prudent in relation to that sale and property alone.
The recent judgment in Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd demonstrates this acutely. The issue in the case involved whether the lender (Manda), or its legal team, ".failed to do what a reasonable and prudent person would do or has done what a reasonable or prudent person would refrain from doing in the circumstances."2
The background to these proceedings involves Manda, an experienced non-bank lender, having advanced a $6.39 million loan to PEC for a Melbourne property, on which PEC defaulted some months later. Manda took possession of the property and marketed and sold it for $7 million via a four-week expression of interest campaign. However, the amount owed exceeded the net proceeds of sale from the property. As a result, Manda demanded PEC repay the balance and commenced proceedings accordingly.
On the surface, the matter appeared straightforward. Delving into the detail, however, it became particularly tricky. PEC admitted default under the loan and accepted the outstanding debt under the loan agreement. However, PEC then brought a counterclaim against Manda, stating its sale of the property in question breached Section 420A of the Corporations Act. PEC alleged that if Manda had sold the property in accordance with its duties under Section 420A, it would have achieved a price of $7.8 million which would have repaid the entire outstanding liability owing under the loan agreement.3 Fortunately for Manda, the case went in its favour. PEC's counterclaim was dismissed for lack of merit and not substantiating any breach of Manda's duty under Section 420A of the Corporations Act.
Foremost among the key learnings from this case is that lenders need access to the right expertise to understand exactly what constitutes taking all reasonable care under Section 420A and how to navigate the selling process accordingly. Bank lenders have many years of experience in managing and enforcing on their security, whilst non-bank lenders, many of whom are new entrants, do not have the same depth of experience. If non-bank lenders do not access the appropriate expertise, they remain vulnerable to litigation, especially as we approach a market of greater uncertainty, risk of downturn and business failure.
With increased scrutiny being placed on lenders and their appointed controllers in discharging their duties, it is critical that all lenders engage expert advice when there is a need to enforce on their security. Those lenders who consider the sales process a straightforward practice that can be performed without expert involvement run a high risk of being blindsided by costly legal action. Although Section 420A requires that a lender and its appointed controller must take reasonable care to sell a property for not less than market value or the best obtainable price given the circumstance,4 the differences from one power of sale transaction to another create a minefield that requires expert skill and experience to navigate.
2 David Dickens, Cameron Forsyth and Benjamin Wilson, First judicial decision on a mortgagee sale during COVID-19 restrictions (1 August 2022) Hall & Wilcox <https://hallandwilcox.com.au/thinking/first-judicial-decision-on-a-mortgagee-sale-during-covid-19-restrictions/>
4 Cameron Cheetham et al, Mortgagor alleges duty of care breach during COVID-19 pandemic property sale (19 August 2022) Corrs Chambers Westgarth <https://www.corrs.com.au/insights/mortgagor-alleges-duty-of-care-breach-during-covid-19-pandemic-property-sale>
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.