Duty of mortgagee to sell at market value: practical tips

Most States have laws which require that a mortgagee of real property, when exercising a power of sale, must take reasonable care to sell the property for not less than market value. When the mortgagor is a corporation, section 420A of the Corporations Act 2001 (Cth) also applies.

In Sablebrook P/L v Credit Union Australia Ltd [2008] QSC 242 the mortgagor Sablebrook claimed that CUA had breached its duty and sold its property for less than market value. The Supreme Court of Queensland awarded judgment for the mortgagor of damages in the amount of $44,000, together with interest in the amount of $21,120, a total of $65,120.

In April 2003 CUA exercised its power of sale as mortgagee over land owned by Sablebrook at Hervey Bay (“Lot 4”). It sold Lot 4 for $240,000 without advertising it for sale or listing it with a real estate agent. The figure of $240,000 exceeded a valuation of $225,000 that CUA had obtained in December 2002.

Sablebrook alleged that CUA breached its statutory duty to take reasonable care to ensure that the land was sold at the market value. Sablebrook contended that the market value of Lot 4 was $450,000. CUA defended its sale by private treaty, and argued that the market value of Lot 4 was in the range of $200,000 to $225,000. However, an expert valuer called by CUA as a witness, Mr Olive, expressed the opinion that the market value of Lot 4 at the date of sale was $255,000.

The trial judge concluded:

"I find that CUA did not take reasonable care to ensure that Lot 4 was sold at market value in April 2003. It did not take steps to assure itself that the price of $240,000 was the market value. It did not assure itself that $240,000 was the best price that it reasonably could obtain. CUA did not have a current valuation, or some other reliable evidence of current value, as distinct from the December 2002 HTW valuation. The property had not recently been taken to the market by Sablebrook by advertising the property for sale and attracting offers either at an auction or by private treaty. Sablebrook attempted to achieve a “friendly sale” to the wife of one of its directors, but that sale did not come to fruition."

Practical tips

Practical steps that a mortgagee can take to satisfy its duty of care include:

  • obtaining an up to date valuation or at least 3 quotes from local agents;
  • carry out adequate advertising over a sufficient period of time;
  • respond to genuine enquiries about the property;
  • sell the property by auction.

ABIO Bulletin 38 (pdf) sets out frequent areas of complaint by mortgagors including:

  • inadequate advertising
  • not ascertaining the value
  • private sale rather than auction
  • improvements before sale
  • selling to an employee or associate of the mortgagee
  • insurance and protection of the property
  • management of the sale
  • sale expenses
  • failure to account after sale
  • the amount of the debt
  • setting the reserve and disclosure of reserve
  • timing of the sale

Review your procedures and ask yourself the questions set out in pages 13 to 15 of the Bulletin to check whether you are carrying out your duty.

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