Perils in exercising power of sale29 January 2009 Topics: Banking and financial services
In Sablebrook P/L v. Credit Union Australia  QSC 242 the mortgagee breached section 85 of the Property Law Act 1974 by failing to take reasonable care to ensure the mortgage property was sold at market value.
The mortgagee did not advertise the property for sale or list it with a real estate agent. The property was sold for $240,000. The mortgagee relied upon a valuation of $225,000 which was approximately 4½ months old at the date of the contract. At the time of the sale there was a rise in the market. No updated valuation opinion was obtained at the time of the sale.
There were issues concerning whether the swimming pool on the property encroached onto adjoining land. There was also a dispute involving the adjoining property owner who claimed a right of easement in respect of the swimming pool.
The approach taken by the Court in respect of section 85 involved two steps. The first issue for determination was whether the mortgagee took reasonable care to ensure that the property was sold at its market value (“the breach of duty issue”). If the mortgagee breached its duty, the issue then was whether the mortgagor suffered any loss as a result of the breach of duty and the measure of any loss.
It is significant that the first issue for determination is whether the duty was breached and not the measure of any loss.
Applying earlier judicial authority the Court said the duty of reasonable care under section 85 was to make sure, and to assure oneself that the price at which the property is proposed to be sold is the best price that can reasonably be obtained.
The mortgagee argued it was reasonable to rely on the valuation and to sell the land by private treaty and that there were a number of aspects that made this an appropriate method of sale. It was contended that the land had limited development potential which would limit its appeal to prospective purchasers.
The Court said that the mortgagee’s submissions were misplaced as they relate to the market value of the land and not whether it was reasonable not to take the land to the market.
Upon the facts each of the following matters were found to constitute a breach of the duty:
- Failing to obtain an up to date market valuation and not making any enquiries about the change in the market;
- Not obtaining any opinion from any local real estate agents as to value;
- Not taking steps to attract potential buyers by advertising the property, listing with agents or by other means.
- Failing to investigate the factual basis or obtaining legal advice concerning the merits of the threatened claim relating to the swimming pool.
The Court endorsed earlier legal authority that the duty “extends to the steps to be taken to attract potential buyers to the property, the negotiations for sale, and the settling of the terms of sale”. It was also noted that “certainly, in the ordinary case, the mortgagee must be expected to advertise and otherwise make efforts to find a buyer at a good price, not merely to take the first offer which comes along”.
The Court concluded that the decision to sell was made for the simple reason that the price on offer exceeded the valuation and was treated by the mortgagee as representing a “premium” of $15,000.
If the mortgagee had a concern about the potential legal issues which featured in its decision to sell, then the mortgagee was obliged to make some enquiries into the dispute and the extent of its likely impact upon market value.
Tellingly, the Court said there was no reasonable justification for the mortgagee not adopting its usual practice of listing a property for sale after contacting a number of local agents and appointing an agent who was considered would do the best job in selling the property.
Although the mortgagor had the onus of establishing that the purchase price obtained was less than the market value it was not necessary for the mortgagor to prove that some identifiable individuals would have purchased the property at the market value.
Damages were assessed by calculating the difference between the market value and the sale price and then making an adjustment for the marketing costs and commission that would have been incurred by the mortgagee as an incident of a sale at market value.
In arriving at a market value of approximately $293,000 on the valuation evidence, the Court allowed a discount of $30,000 as being appropriate in the circumstances due to the threat of litigation relating to the swimming pool.
Damages against the mortgagee were assessed in the amount of $44,000 after taking into account the hypothetical marketing costs and commission. Interest was also awarded.
What it means for mortgagees
In Sablebrook there are warnings for a mortgage seeking to exercise power of sale.
The mortgagee’s duty is to make sure that the property is sold at the best price that can reasonably be obtained. If the Court finds that the mortgagee has failed to comply with the breach of duty issue then the mortgagee will be exposed to the uncertainties associated with the determination of market value. In this dispute, the litigation costs most likely exceeded the amount of the judgment.
In Queensland, a mortgagee must also now be aware of the Property Law (Mortgagor Protection) Amendment Act 2008 which was assented to on 4 December 2008.The amendments made to section 85 of Property Law Act stipulate the steps that are required to be taken when exercising power of sale under a prescribed mortgage, unless the mortgagee has a reasonable excuse. The definition of mortgagee includes the attorney for a mortgagor and a receiver acting under a power delegated to the receiver by a mortgagee.