Mortgagees: Can you take possession or sell before an expired notice of exercise of power of sale?

16 August 2010 Topics: Property and planning law, Litigation and dispute resolution

Background

Section 84 of the Property Law Act in Queensland provides that a mortgagee may not exercise the power of sale unless a notice under section 84 has been served on the mortgagor and the specified default is not remedied within 30 days from service of the notice.

Ordinarily a mortgagee will wait for its section 84 notice of exercise of power of sale to expire before taking possession or before entering into a contract of sale as mortgagee.

Is there a prohibition in Queensland on a mortgagee taking possession or entering into a contract of sale as mortgagee before the expiry of the section 84 notice?

This issue can be relevant where, for example, the mortgagee wishes to commence marketing or enter into a contract of sale so as not to lose a potential buyer. Circumstances may also occur where an earlier notice purported to be served under section 84 is invalid or has not yet expired.

Earlier authority

In Boston Peak Pty Ltd v Houghton [1999] QSC 48 the Court said, it is clear that “a mortgagee may take steps to exercise its power of sale by entering into a contract prior to the mortgagee obtaining the right to sell “provided the contract is conditional upon the power of sale being exercisable at the end of requisite default period”.

It is apparent from this decision that a mortgagee in Queensland can enter into possession and carry out marketing prior to the expiry of the section 84 notice. It is also permissible for the mortgagee to enter into a contract before the expiry of the section 84 notice provided the contract is conditional upon the power of sale being exercisable at the end of the period stipulated in the section 84 notice.

A further decision

More recently in St George Bank Limited v Perpetual Nominees Limited & Anor [2010] QSC 57, there was a dispute between mortgagees regarding the validity of a land sale contract and a business sale contract entered into by the first mortgagee.

On 23 November 2009 the first mortgagee entered into the contracts of sale prior the service of the notice of exercise of power of sale. On 9 December 2009 the first mortgagee served a section 84 notice. On 23 December 2009 the seller and buyer varied the contracts of sale by inserting a clause making the contracts subject to first mortgagee’s power of sale being exercisable.

The arguments

The mortgagees all accepted that a mortgagee may take steps to exercise its power of sale by entering into a contract prior to obtaining the right to sell, provided the contract is conditional upon the power of sale being exercisable at the end of the requisite default period.

The subsequent mortgagees argued that the first mortgagee’s contracts were not subject to such a condition when the contracts were made and that the contracts could not be varied at a latter date in a way which would satisfy section 84.

The decision

The Court did not consider that there was any relevant distinction between a contract originally subject to such a condition and one that is varied so that it becomes subject to such a condition, so long as the variation takes place sufficiently in advance of the completion of the contract.

In this particular case, the date for completion of the contracts was fixed by reference to the fulfilment of a number of conditions, and it was not suggested that the variation of the contracts on 23 December 2009 was not sufficiently in advance of the date for completion to allow the 30 day period under the section 84 notice to expire.

Implications for mortgagees

A mortgagee’s contract of sale should include a condition that the contract is conditional upon the mortgagee’s power of sale becoming exercisable at the end of a section 84 notice of exercise of power of sale.

The contract should also include other conditions that provide the mortgagee with flexibility to enable the mortgagee to comply with section 84 and at the same time ensure that the mortgagee does not lose the sale.

Before taking enforcement action, a mortgagee will still need to comply with any requirements stipulated in the loan agreement or mortgage and comply with the requirements under the National Credit Code (where applicable).

For more information regarding this article, please contact Graham Roberts, Partner on 07 3231 2404.

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