Banking And Finance Update - The Statutory Duty To Sell At Market Value

Contents

• The Statutory Duty To Sell At Market Value
• Indefeasibility Of Title

The Statutory Duty To Sell At Market Value

The October 2008 decision of the Queensland Supreme Court in Sablebrook provides guidance for mortgagees when exercising a power of sale upon default by a mortgagor. The use of valuations and the consideration of market trends by mortgagees are considered by courts when determining reasonableness.

Facts

The mortgagee sold the property to the neighbouring body corporate for $240,000 in April 2003. The land had been valued in December 2002 at $225,000.

The mortgagee did not engage local agents nor did it seek an opinion or an updated valuation as to the land's value. The December 2002 valuation did not discuss market trends.

Did the mortgagee act reasonably in selling the property when relying on the December 2002 valuation in circumstances where it had no knowledge of market trends in the relevant area or of the extent of any potential increase in value?

Decision

The court found that the failure to obtain an updated valuation meant that the mortgagee had not exercised reasonable care to ensure that the property was sold at market value.

In particular the mortgagee:

• had no knowledge of market trends or the market value of the property at the time of sale and had sought out no reliable information concerning these matters;

• sold the property privately and without proper advertising (failing to attract the largest number of potential buyers); and

• took no steps to determine whether it was obtaining market value for the property.

Practical implications

In these uncertain economic times mortgagees should take care to:

• take the property to market through the use of appropriate advertising and seek the advice of agents to attract the largest number of potential buyers;

• sell the property at an auction when possible; and

• obtain a written valuation before sale especially where there is movement in the property market.

Indefeasibility Of Title

The October 2008 Federal Court decision of Haslam highlights the need for lenders to carefully check the conditions of any pre existing lease arrangements before taking a mortgage as security over property.

Facts

Several retirees sold their homes to corporate purchasers on terms which guaranteed them monthly payments and the right to occupy their homes for the remainder of their lives or until the property was vacant for more than 6 months.

The "right to occupy" was not noted on the title by way of a registered lease, however the lender knew that the homes were tenanted (or at the very least should have known). The purchasers borrowed money to finance the acquisitions secured by registered mortgages over the properties. Default followed and the mortgagee sought to exercise its rights under the mortgages.

Decision

Did the mortgagee have to enforce subject to the unregistered leases (being the retiree's equitable interest as occupants)?

The court found that the unregistered leases took priority as they fell under an exception to the rule of indefeasibility. The general position at law is that a mortgagee who takes a mortgage with notice of a tenancy will take the mortgage subject to the terms of the tenancy. In this case, the mortgagee failed to make appropriate enquiries to its own detriment.

The retirees were entitled to specific performance of the contracts for sale and were found to have an equitable interest in the properties, retaining possession of the property as tenants. This clearly has a major impact on the value of the property.

Practical implications

Mortgagees need to understand the terms of any pre existing leases or entitlement to possession of the property. While a registered interest will usually prevail, there are circumstances where it will not. Turning a blind eye to potential issues often does not protect a mortgagee from aspects of a transaction that would have been discovered on appropriate enquiry. This case reminds mortgagees that now is a good time to review mortgagees' appetite for risk, and to re-assess due diligence procedures.

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.