November 1, 2011 marks the date when lenders exercising their power of sale over a property in New South Wales will be required to comply with amended obligations contained in the Real Property and Conveyancing Legislation Amendment Act 2009 (NSW), which amends the Conveyancing Act 1919 (NSW)
The Conveyancing Act will now require a mortgagee or chargee to take reasonable care in exercising its power of sale over property to ensure that the property is sold for:
- Not less than market value, or
- If there is no ascertainable market value, the best price that can reasonably be obtained in the circumstances
The obligation also applies to agents of the mortgagee or chargee, who are appointed to sell the property. Real estate agents or others appointed by the mortgagee/chargee may also be exposed to direct liability if the new obligations are not met.
Parties cannot contract out of their duty under the new amendments and it will apply to mortgagee sales arising as a consequence of a default after November 1, 2011, even if the mortgage was created before that date.
What are the differences between the existing and new legislation
Currently duties are imposed on mortgagees in NSW by the general law to act in good faith when exercising power of sale on property owned by individuals (as opposed to corporations) ie to act honestly and fairly on behalf of the mortgagor to not sacrifice the mortgagor’s interest in the property. Provided the mortgagee complies with this standard, it does not matter if they are negligent.
The new standard is similar to that imposed by S.420A of the Corporations Act, which applies when the mortgagee is selling the property owned by a corporation. It is anticipated that the Courts will rely on case law about S.420A when interpreting the new S.111A legislation.
We do not expect the new legislation to have a significant impact on the mainstream lenders as best practice for them, especially those operating nationally, has been to meet the standard set by S.420A for both corporate borrowings and borrowings by a natural person rather than to adopt different procedures for each.
The new legislation does not impose any obligation to sell the property at ‘market value’ or ‘best price’ but rather requires the mortgagee to take reasonable steps to obtain the best result, therefore the focus is not on the result achieved, but the efforts that are actually taken to try to achieve the best result for the mortgagee.
Important steps a mortgagee should include in taking reasonable care
- Obtain a professional valuation: Mortgagees should obtain an up to date valuation from a qualified valuer with experience and expertise in the relevant market
- Advertise the property: (where appropriate) – Mortgagees should endeavour to advertise the material details about the property (nationally or internationally where appropriate) to reach the largest possible group of potential purchasers
- Leave the property on the market for a reasonable period: Allow enough time in the market to achieve the best result – this will usually involve allowing time to:
Advertise adequately and provide sale information to a reasonable number of prospective purchasers, and
Allow an inspection and assessment of the property by potential purchasers so that they are in a position to make offers or bids on the property
- Sale by auction – This can often be the most appropriate way to achieve the market value
What will happen if the mortgagee breaches its duty under the Act
If a mortgagee breaches it duty under S.111A of the Act, a person who suffers loss or damage as a result of that breach can sue the mortgagee for damages. However (absent other factors that might permit the sale to be challenged, eg by a liquidator) a breach cannot be relied on as a ground to challenge the title of any purchaser from the mortgagee.