More on a mortgagee's duty to a mortgagor on a mortgagee sale

  • Author : Bill Stark - 29-05-2014

Since the decision of the Victorian Court of Appeal in Nolan v MBF[2011] VSCA 114 (see my blog post of 26 August 2011), there have been a few cases on a mortgagee's duty to a borrower upon a sale by the mortgagee.

In CBA v Thompson [2013] NSWSC 149, Harrison As J of the Supreme Court of NSW, was called upon to consider a claim by a guarantor that the Bank had done the wrong thing, and as a result the guarantor was excused from liability.

Background
The bank (as successor in title to the Bank of Western Australia Ltd) took possession of a failed residential development in Biloela in Queensland. After a considerable delay, the bank took proceedings against the guarantor for $1.9m, plus accrued interest of over $1m, plus costs.


 

The guarantor claimed that the bank:

  1. Had to sell the security property before enforcing the guarantee;
  2. Could not recover any amount from the guarantor until the security property was sold; and
  3. Had engaged in unconscionable conduct by starting to market the security property for a brief period and then did nothing for 18 months.

Harrison As J examined the terms of the guarantee and concluded (at paragraphs 46 and 47):

... it is my view that the second defendant has agreed ... that he had an obligation to repay the Bank the money without the Bank first seeking payment from [the borrower]. The second defendant has also separately indemnified the plaintiff against loss suffered by the Bank by virtue of the guarantee. The obligation of the second defendant to repay the money owing is an independent one that extends to the entirety of the debt ...

The second defendant has also agreed to terms that the Bank is not liable for any loss caused by the exercise, or attempted exercise of, failure to exercise, or delay in exercising a right or remedy, whether or not caused by its negligence and that the plaintiff will have full power to do all or any of the following: the taking of possession, receipt of rents and sale of the property

Her Honour found that the Bank had indeed done "very little" (paragraph 53; after about 18 months of almost complete inactivity - paragraph 67) to market or maintain the properties for a considerable length of time, but had more recently taken steps to sell the properties. The court noted that the Bank did not seek interest over the period it had taken little action; this factor must have been relevant in the ultimate decision of the court.

Counsel for the guarantor argued that the circumstances of the case were such that there had been a high level of moral obloquy by the lender, on the basis that it took possession of the property as security, and in failing to realise any of those properties for nearly 2 years, it prevented [the borrower] from taking steps to sell or improve the properties for sale and applying the proceeds of sale against what the Bank owed to the plaintiff. This action by the lender interfered with the guarantor's ability to cause [the borrower] to pay the plaintiff.

The guarantor relied upon an English Court of Appeal decision: Palk v Mortgage Services Funding plc [1993] Ch 330.  In that case, the mortgagee had taken possession of the security property, and proposed to do nothing for the foreseeable future, until the market improved. The consequence was that the guarantor in that case (Mrs Palk) may have had to pay for a shortfall if the market did not improve. The guarantor argued that the lender was speculating about the future of the property market at her expense.

The lender argued that it may choose which remedy it wishes to pursue and when, so long as it acted in good faith and not for some collateral purpose. It may choose the time of sale, however disadvantageous this may be for the mortgagor. If it decides to sell, it must exercise reasonable care to obtain the proper market value, but it is under no duty to exercise its power of sale. 

The Court of Appeal concluded under the heading "a duty to be fair": 

... a mortgagee can sit back and do nothing. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor.

Relying on Palk, the guarantor in Thompson argued that by doing nothing the Bank was in breach of an implied duty to be fair to a mortgagor, and its guarantor.

Her Honour considered the decision in Palk, but decided not to follow it for 2 reasons:
(a) while the Bank had been dilatory since taking possession of the Biloela property, at the time of the hearing it had taken steps to sell the property, in accordance with the guarantor's wishes; and 
(b) the prejudice that the guarantor suffered by the Bank's inaction had been ameliorated, because he was no longer obliged to pay interest on $1.9M that accrued over the period when the Bank was dilatory (due to a concession by the Bank about that issue, apparently on the last day of trial).

In these circumstances, the court concluded that the conduct of the Bank over the delay period was not unconscionable.

Implication from findings 
The implication from the court's finding is that if the Bank had not waived its claim to interest for the extended period of its delay, it would have engaged in unconscionable conduct.

In the circumstances, it seems that lenders will be found to owe a duty to a borrower and its guarantors to act in a timely manner in selling security properties, or "a duty to be fair".

About the Author

Bill Stark

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