Lenders beware – will you be able to prove service of your default notices?

In a recent case in the District Court of Queensland, a lender failed to prove it had served default notices. The lender was unsuccessful in obtaining summary judgment for the loan debt and possession of the mortgaged property.

Background

In Secure Funding Pty Ltd v West [2017] QDC169, the following occurred:

• The lender claimed it had posted to the borrower (who also was a mortgagor) a notice of exercise of power of sale under section 84 of the Property Law Act 1974 (Qld) (Section 84 Notice) and a default notice under section 88 of the National Credit Code (Cth) (Code Notice).
• The borrower denied receiving the default notices.
• On the summary judgment application, the lender was only able to attest to a belief that the default notices had been sent to the borrower.
• There was no evidence that the notices were actually posted or of the address they were posted to.
• The lender argued that it did not need to give the Section 84 Notice and Code Notice before commencing legal proceedings.
• The borrower argued the opposite.

The lender’s loan documents

The loan documents provided that:

• if the borrower was in default, the lender could give the borrower a notice stating the borrower was in default;
• if the borrower did not correct the default within the period stipulated in the notice, then, at the end of that period and without further notice to the borrower, the total amount owing would become immediately due for payment; and
• the lender could then sue the borrower for that amount, or enforce any security, or do both.

The Court decision

The Court observed that the giving of the Section 84 Notice was not a prerequisite to commencing legal proceedings, as the proceedings were only seeking repayment of the loan debt and an order for possession. (A distinction is drawn between seeking an order for possession and the actual sale of a mortgage property).

Given the terms of the loan agreement the Court did not need to determine whether the giving of the Code Notice was a prerequisite to suing for the loan debt and seeking an order for possession.

However, the terms of the loan agreement were critical.

Under the terms of the loan agreement, before the lender could commence legal proceedings against the borrower:

• the lender had to give the borrower a default notice; and 
• the borrower had to fail to remedy the default in accordance with the default notice.

While there was a copy of the default notice on the lender’s file, the lender failed to establish that the default notice required by the loan agreement had in fact been given to the borrower.

The Court held there was a factual dispute about service of the default notice that would need to be determined by a trial.

Comments

This case reinforces that a lender must comply with the terms of its loan agreement and mortgage before commencing legal proceedings.

Clauses requiring the giving of a default notice as a prerequisite to commencing legal proceedings (sometimes called a period of grace clause) are common in residential loans.

A lender must ensure that appropriate default notices are given and that they are given in a manner that complies with the terms of the loan and mortgage documents, the National Credit Code (where it applies) and relevant legislation.

The case is also a timely reminder for lenders to ensure they have appropriate processes in place to be able to establish they have given any necessary default notice before commencing legal proceedings.

If you would like further information about these issues, please contact Graham Roberts, Clare McDonald or Taylor McCaw of our litigation and dispute resolution team on 07 3231 2444.