Mortgagee fails to take reasonable care to obtain market value

25 August 2014 Topics: Banking and financial services, Insolvency and restructuring, Litigation and dispute resolution

Deficient advertising is not saved by the information memorandum

In a recent case involving a rural property in Queensland, the mortgagee failed to comply with its duty to take reasonable steps to obtain market value because the mortgagee’s advertising did not adequately refer to the water rights relating to the property and their tradability.

The mortgagee’s information memorandum contained documents referring to the water entitlements; however this disclosure in the information memorandum was not enough to save the mortgagee.

The decision in Australia and New Zealand Banking Group Limited v Pola [2013] NSWSC 1801 highlights the importance of ensuring that the key attributes of the property (including any rights being sold) are featured in the advertising.

The decision is also a warning that mortgagees or receivers will not be able to simply rely upon information disclosed in an information memorandum or in an electronic data room.

The duty under section 85

Section 85(1) of the Property Law Act 1974 (Qld) provides:

It is the duty of a mortgagee, including as attorney for the mortgagor, or a receiver…, in the exercise of a power of sale …to take reasonable care to ensure that the property is sold at the market value.

A sale below the estimated market value does not of itself mean that the mortgagee failed to comply with its duty to take reasonable care to ensure the property was sold at market value. Rather, the mortgagor needs to show the steps it says the mortgagee should have taken to ensure the property was sold for market value.

Once the mortgagor proves that the mortgagee breached section 85, it is not necessary for the mortgagor to prove a causal link between the breach and the loss.

As long as the mortgagor establishes that the mortgagee failed to take a step that was reasonably necessary ‘to ensure’ market price was achieved, it does not need to prove that, if that step had been taken, market price would have been achieved. The mortgagor is not required to prove that, if the mortgagee had not breached its duties, a buyer would have offered to purchase the property for any particular price.

When a court finds the mortgagee has breached its duty under section 85, there are two relevant enquiries.

  • What was the market value of the property at the time of the sale?
  • Was the sale price less than the market value?

At this point of the analysis, a mortgagee can be vulnerable to differences in expert evidence regarding the market value of the property.

Applying earlier authorities, the Court in Pola made the following findings:

  • Where a property has assets or rights attached to it (such as water rights) that are potentially valuable but not readily transferrable, in order to discharge its duty under section 85, the mortgagee must:
    • consider, and if necessary, make enquiries and obtain advice on how the property or the benefit of the rights or assets might be passed onto a purchaser; and
    • properly ascertain the market value of the property with and without those rights.
  • The mortgagee’s advertising must:
    • be by appropriate means and at appropriate times so as to maximise the interest of potential purchasers;
    • be accurate and without material omissions; and
    • not improperly emphasise the sale as a ‘mortgagee sale’ so as to be likely to depress the level of offers.

Pola: the arguments

The mortgagors argued that the mortgagee had failed to comply with its duty by not selling the water rights separately to the land.

There was considerable evidence at trial regarding the enquiries the mortgagee had made concerning the nature of the different water rights, whether they could be sold separately and their value if sold separately. On the facts, the mortgagor’s argument was unsuccessful.

The mortgagor’s other criticism was that the mortgagee’s advertisements did not refer to the water rights and their tradability.

The advertising referred to the property as being irrigated and having ‘centuries of alluvial flows’. There was a picture of a crop under irrigation, but the advertising did not refer at all to the water allocation, water licences and their tradability.

The mortgagee argued that a reader considering the purchase of a very large and expensive farming property on which there is irrigation, in all probability would assume the property enjoyed water entitlements. It argued that the knowledge of the water aspects of the property was addressed in a very broad brushed approach in the advertising.

The mortgagee’s evidence also emphasised what they perceived to be the danger of including too much information in any advertising. In essence the mortgagee argued that, as a general position, the more information you put in an advertisement, the less response you get to it.

The mortgagee suggested that the purpose of advertising is to generate enquiry so the mortgagee can find out what aspect of the property people want to think about. The mortgagee argued that the purpose of advertising was to draw attention and enquiry and not to provide a complete account of information.

Deficient advertising and information memorandums

The Court accepted the mortgagee’s submissions that a reader considering the purchase of a very large and expensive farming property on which there is irrigation would probably assume the property enjoyed water entitlements.

However, the Court said that a prospective purchaser who is considering a number of possibilities and weighing up whether to purchase the property may well have been tempted to investigate further, had details of the water entitlements featured in the advertisements. Conversely, such a prospective purchaser may well have been deterred or deflected from further considering the property in the absence of those details.

The Court was not distracted by the philosophical arguments regarding advertising or the role of a real estate agent. The paramount consideration was the mortgagee’s compliance with its duties.

The Court held as follows:

  • The water entitlements were a key feature of the property that should have been included in the advertising.
  • Inadequate or defective advertising is not necessarily cured by the fact that the mortgagee’s entire marketing process included additional information available from the agent that correctly disclosed the position. A potential buyer may be dissuaded from making further enquiries by the defective advertising.
  • There was no requirement for the mortgagor to prove that the absence of a reference to the water entitlements in the advertising made a difference to any particular purchaser. All that was required to be established was that the inclusion of such details was a step that ought reasonably to have been taken by the mortgagee to ensure market value was achieved.
  • Emphasising the property’s water entitlements in the advertising was a step, or an act, that ought reasonably to have been done to ensure the property was sold at market value.

As the mortgagee did not take this step, the Court held that the mortgagee had breached its duty under section 85.

On the basis of the defective advertising, the Court awarded the mortgagors damages of $900,000 representing the difference between the price achieved at the mortgagee’s auction ($6.1 million) and the market value of the property ($7 million).

Implications for mortgagees and receivers exercising power of sale

The decision in Pola is equally applicable to receivers selling property. Mortgagees and receivers alike must:

  • conduct appropriate searches and enquiries to ascertain the key assets and features of the property (which may include rights attached to the property, such as licences or development approvals) before advertising the property for sale;
  • consider whether the rights attached to the property should be sold separately or with the property;
  • feature the key aspects of the property being sold in the advertising – merely including the key features in the information memorandum or electronic data room will not suffice; and
  • carefully consider the content of the advertising – the devil is in the detail.

If you would like more information about these issues, please contact Graham Roberts or Sarah Dewar on +61 7 3231 2404.



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