On 3 December 2008, the Property Law (Mortgagor Protection) Amendment Act 2008 (Qld) (“the Act”) was passed by the Queensland Parliament. The Bill was urgently rushed into Parliament and approved on 3 December. It received Royal Assent on 4 December.
The Act has not yet commenced and will commence on a date to be fixed by proclamation. The proclamation date is expected to be imminent.
In summary, the Act amends section 85 of the Property Law Act 1974 (Qld) in relation to duties of a mortgagee in exercising power of sale, by:
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extending the duty to take reasonable care to ensure that the property is sold at market value to situations where property is sold by a receiver under a delegated power or by the mortgagee as attorney for the mortgagor;
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specifying steps which the mortgagee for a “prescribed mortgage” must follow to satisfy that duty; and
- creating an offence for a mortgagee under a “prescribed mortgage” for failing to follow the stated steps. This offence carries a penalty of up to $15,000.00.
Sale at Market Value
The purpose of these amendments is to provide further protection for mortgagors by strengthening and extending the ambit of the mortgagee’s duty to take reasonable care to ensure that secured properties are sold at market value.
The statutory duty now expressly extends to sales undertaken by a receiver or a mortgagee acting as attorney for the mortgagor. Previously, section 85 of the Property Law Act only applied to “mortgagees” although the definition of mortgagee extended to “any person from time to time deriving title to the mortgage under the original mortgagee”. The expressed intent of these amendments is to ensure, not only that full amount owing to the lender is recovered, but also that the mortgagor has the maximum possible funds available to them to make a fresh start after any type of mortgagee or receiver sale.
The new section 85(3) of the Property Law Act will also provide that “a person damnified by the breach of duty has a remedy in damages against the mortgagee or receiver exercising the power of sale”. In other words, mortgagors will soon have a statutory right to claim damages against receivers in breach of this duty.
The extended obligations under section 85 of the Property Law Act will apply to mortgages over Queensland land whether made before or after the commencement of the Act.
Prescribed Mortgage
The Act also now stipulates pre-sale obligations for mortgagees and receivers in relation to “prescribed mortgages”.
At present, there is no specific definition of a “prescribed mortgage”. The new section 85(10) of the Property Law Act provides that “prescribed mortgage means a mortgage of a kind prescribed by regulation”. This regulation has not been introduced yet.
However, in Parliamentary debate the Minister for Justice and Attorney-General, the Honourable Mr Kerry Shine stated “the definition is intended to capture mortgages over land of a consumer credit nature such as for owner-occupier home loans”.
The new section 85(1A) of the Property Law Act provides that if the mortgagee or receiver sale relates to a “prescribed mortgage”, the mortgagee must (unless it has reasonable excuse):
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adequately advertise the sale; and
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obtain reliable evidence of the property’s value; and
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maintain the property, including by undertaking any reasonable repairs;
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sell the property by auction, unless it is appropriate to sell it in another way; and
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do anything else prescribed under a regulation.
These requirements largely reflect the common law position expressed by the Courts but are now codified in statute. It is unclear at this stage what additional requirements may be contained in the regulations to the Property Law Act. However, it is important to note such regulations could contain specific procedural steps which will need to be undertaken prior to any mortgagee or receiver sale of secured property.
Similarly, the meaning of “reasonable excuse” is unclear but it is likely to depend on the circumstances of each individual case.
The penalties for contravention of this section are up to $15,000.00. These fines are new.
It is important to note that the pre-sale requirements in relation to “prescribed mortgages” will not apply to a mortgagee or receiver if they were entitled to exercise the power of sale immediately before the commencement of these new provisions. As the commencement date is not yet known, these amendments should be front of mind for any mortgagee or receiver now.
Recent Court Decision - Sablebrook Pty Ltd v Credit Union Australia
The amendments to the Property Law Act have made clearer the minimum standard that is required by mortgagees and receivers to comply with the statutory duty.
The statutory duty is based on the common law test of reasonable care as established by the Courts.
Prior to the introduction of the above amendments, a body of case law from the Courts has set the standard of pre-sale obligations required by a mortgagee.
In particular, Sablebrook Pty Ltd v Credit Union Australia [2008] QSC 242 - a recent decision by the Supreme Court of Queensland - highlights the potential exposure of mortgagees when exercising their power of sale in respect of land.
It also presents a timely reminder that, in most instances, a mortgagee ought go to market and seek reliable and current valuations when determining a reasonable sale price.
Facts
In this case, the property was vacant land (improved only with a swimming pool) and adjoined land owned and operated by owners of a resort. There was some dispute with the resort owners as to whether the pool encroached the resort land.
The mortgagee sold the property to two owners of units in the resort development for $240,000.00 in late April 2003. The sale price was $15,000.00 more than the market value stated in the valuation obtained by the mortgagee only four and a half months earlier.
The mortgagee did not market the property for sale nor did it obtain a further valuation prior to sale.
The Alleged Breach of Duty
The mortgagor sued the mortgagee alleging that it had breached its statutory duty to take reasonable care to ensure that the property was sold at market value. The breach was alleged to have occurred by virtue of failures to:
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obtain a valuation at or about the date of entry into the contract;
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offer the property for sale to the public at large;
- engage a local real estate agent and to advertise; and
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investigate the merits of the adjoining owner’s dispute and alleged interest in the property (which was unfounded).
The Court’s Observations
The court noted that section 85 of the Property Law Act (as it stood) did not impose a strict obligation to sell at market value.
Each case needed to be determined on its own facts. It would not always be necessary to put a property to the market.
For example it was conceivable that an enthusiastic buyer would offer a sum in excess of any likely market value. Nevertheless, a mortgagee ought to be slow to act in such a manner, unless there was sufficient reason to do so.
The Court’s Decision
The failure to make enquires as to the movement of the market in the period between receipt of the valuation and contract of sale (i.e. four and a half months) was a breach of duty.
Moreover, the valuation in the mortgagee’s possession proceeded on the basis that the swimming pool encroached on to the adjoining land. By the time of sale, the mortgagee knew this not to be the case. Nevertheless, it did not seek an updated valuation and ought to have done so in accordance with its statutory duty.
The mortgagee was not entitled to rely on a submission that due to the dispute as to access to the swimming pool it was reasonable to sell to the owner of the resort of the adjoining land. The threat of such a claim made it all the more important to take the property to market and to increase the number of potential purchasers.
The offer made by the members of the body corporate of the resort had not been made in a competitive scenario and a failure to ensure this occurred was, likewise, a breach of duty.
Conclusions
Sablebrook
The decision in Sablebrook is a timely reminder to mortgagees that they have a duty to exercise their power of sale with an aim towards achieving the best possible value for the property in the particular circumstances. Whilst it will not always be necessary to put a property to the market, doing so is often good protection for a mortgagee.
Furthermore, disputes as to encroachments or boundaries should also be resolved by obtaining an accurate survey and valuation.
The issues presented by this decision will be of particular interest to mortgagees in a rapidly changing market. Mortgagees ought not assume that valuations only a matter of months old are necessarily reliable.
In most instances, it is unlikely that a mortgagee will fall foul of the law if it expeditiously markets land for sale with the benefit of reliable and current valuations.
Amendments to the Property Law Act
It is important to note that these amendments impose statutory obligations on mortgagees (and now receivers) not dissimilar to those already applying at common law. They should not be a revelation to any prudent mortgagee.
What is of significance is the introduction of a statutory penalty rather than a mortgagee simply being liable in damages for a sale at undervalue.
Further, what must be watched with interest are any developments in the interpretation by the Courts of the new statutory pre-sale obligations of mortgagees in exercising power of sale. Given the consumer protectionism intent of these amendments such developments should be keenly watched.
Recoveries Alert - Updates
We will keep you updated with any case law developments and the introduction of any regulations regarding pre-sale procedures.
Watch this space!
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Matthew Rollason, Partner
matthew.rollason@dibbsbarker.com
Scott Guthrie | Partner
scott.guthrie@dibbsbarker.com
Jason Spencer | Director - Recoveries
jason.spencer@dibbsbarker.com
