What are the duties of a mortgagee to a borrower when exercising its power of sale under the Transfer of Land Act?

  • Author : Bill Stark - 24-08-2011

In MBF Investments Pty Ltd v Nolan[1], the Victorian Court of Appeal considered a mortgagee’s duty when exercising its power of sale under section 77(1) of the Transfer of Land Act 1958 (Vic).
The mortgagee held a first mortgage over a property in the leafy Eastern Melbourne suburb of Kew. The property included a house where the borrower, Mr Nolan, and his family had lived for many years, and 2 vacant blocks. Mr Nolan defaulted; the mortgagee notified him it would sell the property. Mr Nolan proposed to subdivide the land for sale as 3 separate lots.
 
At the auction the first lot (a vacant block) was sold for more than the estimated sale price. After discussion between borrower, mortgagee and selling agent, the home lot was sold next. Those 2 lots resulted in there being a surplus over the amount owing to the selling mortgagee (there were a number of other secured creditors). The remaining lot was passed in at auction but sold by negotiation that day.
 
Mr Nolan sued the mortgagee claiming a breach of duty under s 77(1) of the Transfer of Land Act 1958 (Vic). Vickery J at first instance upheld the claim. The mortgagee appealed.
 
In examining the mortgagee’s duty under s 77(1), the Court of Appeal decided:
  1. In exercising its rights over the security, the mortgagee must act fairly towards the mortgagor, and in a way that does not unfairly prejudice the mortgagor. The duty of a mortgagee to act in good faith can be equated to the duty to not act unconscionably.
  2. The mortgagee must take reasonable steps to obtain the best price consistently with its right to enforce its security interest. This requires the mortgagee to consider how the property should be advertised and allow an appropriate time between the advertisement and the sale.  
  3. The mortgagee’s interest in the property has priority over the interest of the mortgagor so that the mortgagee can protect its own interest. The mortgagee must also have regard to the interests of subsequent security holders.  
 
The facts of the case were quite unusual: the mortgaged land was initially one lot, although prior to the mortgagee sale it was sub-divided into 3 lots, leaving room for an argument (which was accepted by Vickery J, but rejected by the Court of Appeal) that the borrower had a special interest in the house lot of which the mortgagee had to take notice.
 
This case provides valuable guidance as to how a mortgagee should exercise the right of sale.

[1] [2011] VSCA 114

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Bill Stark

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