Financial institutions in control of secured property as a mortgagee in possession (MIP) may be considering how the recent COVID-19 restrictions will impact their ability to run an appropriate sale process, and whether these restrictions will compromise their obligation to comply with their statutory and common law obligations.
Relevant 'social distancing' measures
The Federal Government has added public auctions and open house inspections involving more than one individual to the list of prohibited activities under the constantly evolving 'social distancing' restrictions.
The announcement caused a rush of sellers and agents trying to hold auctions before the 12 am Wednesday 25 March 2020 cut off, while others pre-emptively shifted to private sales or online auctions to align with the new rules. Subsequently, further social distancing restrictions were imposed by government, one of which was that only two people could congregate as a group apart from family members.
While many financial institutions may have suspended any enforcement action against its customers for six months or so, there will still be a number of MIP sales that have already commenced or situations where a voluntary administrator or liquidator has been appointed by the directors or a creditor, perhaps forcing financial institutions to take possession of a secured property as MIP.
Relevant Australian law in a COVID-19 world
Under Australian law, in the words of the Financial Ombudsman, a mortgagee in possession "must take reasonable care to sell the property for either its market value or the best possible price." The degree to which this duty is statutory varies across states, however when considering both case law and legislation, the duty is consistent nationally.
With respect to specific legislation, Queensland requires that, if a secured property is the principal residence of the mortgagor, a MIP must - among other things - "sell the property by auction, unless it is appropriate to sell it in another way".
For the other states, the legislation simply requires that the secured property be sold "by public auction or by private contract". It is at the mortgagee's discretion as to whether an auction would achieve the best outcome and, for example, where auction clearances are low, it is not uncommon for a MIP to revert to a private sale where such action would lead to a better result. It is less common to sell by way of 'expressions of interest' in the residential sale context, but that approach is also available.
Determining the best method of sale
Auction clearance rates have declined dramatically following the mandatory move to online auctions. Although this is undoubtedly, to some degree, attributable to a sudden strain on the technology facilitating these online platforms (including virtual inspections), as well as a lack of familiarity with the medium, it is unlikely clearance rates will return to the highs seen over the past few years any time soon.
These issues aside, online auctions are not a new concept, with a number of online property auction platforms running for years and, once the creases caused by an increase in volume have been ironed out, they present a viable option for MIP's looking to achieve a true market price.
Irrespective of how the secured property is to be sold, a critical part of an MIP's reasonable care process is advertisement, including allowing a sufficient number of potential purchasers to inspect the secured property in order to create a 'market'.
Logistics of advertising and inspections
Given open house inspections are banned, MIP's will need to facilitate these inspections within the new restrictions, which only permit landlords and agents to show a single party through the premises after they have made an appointment with the tenant while maintaining the 'two person' rule.
Although logistically feasible, this will present a litany of logistical issues given the requirement for tenants to vacate the premises during the inspection for a likely increased number of visits due to the one person limit. MIP's will need to allow for, and expect to facilitate, multiple inspections to replace the opportunities to inspect arising from one or two open house inspections. Virtual inspections may be available for some properties but most buyers will want to get a sense for the 'look and feel' of the secured property.
The courts have held that for a financial institution to satisfy their statutory and common law duties to obtain market value or 'best price', it is vital for an MIP to obtain a current expert valuation of the secured property, particularly if sold by private sale or expressions of interest campaign rather than auction. 
With the likely increase in private sales moving forward, it will be more important than ever for MIPs to obtain proper valuations and engage in online advertising to make up for the inability to hold open house inspections and utilise more traditional advertising methods.
Timing of sales
Notwithstanding the above, if an MIP acting on the advice of an agent, forms the view that COVID-19 has depressed the market to a point where it would be economically unreasonable to sell the secured property and crystallise an almost certain loss, there is authority to support an MIP deciding not to sell a secured property and not breaching their statutory and common law duties.
The sale process can be effectively 'parked' until the adverse effects of COVID-19 have passed, but care must be taken in this scenario given that many similar thinking sellers may 'flood' the market at the end of the COVID-19 effected period, causing its own deterioration in values as supply outweighs demand.
Practical guidance on MIP sales in the current environment
The key lesson is that MIP sales can continue under the COVID-19 social distancing restrictions without breaching any common law or statutory duties, but a new way of approaching the marketing and sale campaign is required. Here are some useful practical tips for financial institutions when approaching an MIP sale:
- ensure that agents arrange inspections that do not breach the
two person rule and consider utilising online virtual inspections
offered by many property listing websites;
- consider that longer inspection times will be required to
facilitate couples or families conducting one-on-one inspections
with an agent, as the family unit exception will not apply given
the agent's involvement;
- ensure agents consider the logistics of tenants who must vacate
the secured property in order for inspections to take place while
remaining compliant with social distancing and self-isolation
- utilise established platforms for online auctions;
- consider allowing for extended sale and marketing periods to
account for the increased number and length of inspections required
and to ensure the secured property is sufficiently advertised. For
example, the usual four to five-week period may need to be extended
up to 8 weeks;
- engage in extensive online advertising across a range of
- obtain current, expert valuation of the secured property, particularly if the sale ends up as a private treaty.
2 In Nilrem Nominees Pty Ltd v Karaley Ltd (2000) WASC 82, the court found that a mortgagees failure to obtain a valuation was 'an indication of a lack of prudence' (para 3). Notwithstanding, the extensive advertising undertaken was held to make up for the lack of valuation: 'A lack of a valuation would be most significant if a property was sold for a low price after an inadequately advertised auction or after an inadequately advertised private sale' (para 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.
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