Case note: the mortgagee’s method of sale

In MBF Investments Pty Ltd v Nolan[2011] VSCA 114 the Court of Appeal of the Victorian Supreme Court allowed an appeal by the first mortgagee against the trial judge’s decision that the mortgagee’s order of sale of 3 secured properties breached its statutory duties as mortgagee.

UPDATE: High Court Special leave refused

One of the lots comprised a house in which the owner resided, the other 2 lots were adjoining vacant land. The mortgagee sold the house lot and a vacant lot first at auction rather than selling the 2 vacant lots first. The proceeds of sale of any 2 lots was enough to satisfy the mortgage debt.

The judgment said:

87 Where a mortgagee holds security over several lots of land and is aware or ought to be aware that it is unnecessary to sell all of the lots because the sale of some of those lots would be sufficient to satisfy the mortgage debt and the costs of sale (described below as ‘the full amount’), the sale of more lots than required would conflict with the purpose of the power of sale, which is limited to recouping the mortgagee’s loss. Such a conflict would arise regardless of whether the mortgagee became aware that this was the case either before the sale or after one or more of the lots have been sold.

88 Where it is unnecessary to sell all of the lots held as security, to recoup the amount owed, the choice as to which lots were to be sold could not be driven by an ulterior purpose, such as disrupting the mortgagor’s business or evicting the mortgagor from a home on one of the lots. Such behaviour would be an unconscionable exercise of the mortgagee’s power to sell the property in order to realise the debt. In such a case, even if there were no direct evidence of the mortgagee’s subjective intention, the facts might permit a court to infer that the mortgagee had an ulterior purpose in selecting the order in which the lots were sold.

89 The selection, in such circumstances, of a lot or lots contrary to the wishes of the mortgagor, rather than an equally saleable lot or lots which would be sufficient to satisfy the full amount, might also provide the basis for an inference that the mortgagee acted in reckless disregard of the interests of the mortgagor, thus breaching the duty to sell in good faith. To that extent, the duty imposed on the mortgagee by s 77(1) to have regard to the mortgagee’s interests is not confined to a duty of obtaining the best price.

90 However, where there are genuine doubts about the saleability of some lots or whether the sale of a particular lot or lots will be sufficient to satisfy the full amount, we do not consider that the mortgagee’s duty requires it to take account of the mortgagor’s preference as to the order of sale. The mortgagee’s duty has never been recognised as extending so far.

The Court of Appeal decided that there was no evidence supporting the inference that MBF acted in wilful or reckless disregard of Mr Nolan’s interests or that it had not acted in good faith.

It rejected the submissions that the mortgagor had a right to possession of the house as against the mortgagee or that such right was protected by international human rights principles.

The Court summarised a mortgagee’s duty as follows:

(a) a mortgagee is not a trustee of the power of sale, which is given to the mortgagee to enable the realisation of the security interest;

(b) a mortgagee must act in good faith, that is conscionably, and cannot sell for a purpose other than that for which the power of sale is conferred;

(c) a mortgagee is not required to place the interests of the mortgagor above the mortgagee’s interests in recovering the debt. For example, the mortgagee can sell the property at a time of the mortgagee’s choice, even though the property might realise a higher price if the sale were postponed;

(d) the mortgagee cannot disregard the interests of the mortgagor by simply selling for a price which will cover the amount of the loan. The mortgagee must take reasonable steps to obtain the best price consistently with its right to enforce its security interest. This requires the mortgagee to consider how the property should be advertised and to allow an appropriate time between the advertisement and the sale;

(e) the mortgagee must also have regard to the interests of subsequent security holders; and

(f) if there is no doubt that the sale of the lots preferred by the mortgagor would be sufficient to discharge the debt owed to the relevant mortgagee and of any other security holders whose interest the mortgagee is required to consider, a failure to sell the preferred lots may breach the mortgagee’s duty to sell in good faith.

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