Are there any more recent cases in 2013 on a mortgagee's duty to a mortgagor on a mortgagee sale?

Since the decision of the Victorian Court of Appeal in Nolan v MBF [2011] VSCA 114 (see my blog post of 26 August 2011 - amended on 20 August 2014), there have been a few cases on a mortgagee's duty to a borrower upon a sale by the mortgagee. 

In CBA v Thompson [2013] NSWSC 149, Harrison As J of the Supreme Court of NSW, was called upon to consider a claim by a guarantor that the Bank had done the wrong thing, and as a result the guarantor was excused from liability. 

Background
The bank (as successor in title to the Bank of Western Australia Ltd) took possession of a failed residential development in Biloela in Queensland. After a considerable delay, the bank took proceedings against the guarantor for $1.9m, plus accrued interest of over $1m, plus costs. 

The guarantor claimed that the bank:
1. Had to sell the security property before enforcing the guarantee;
2. Could not recover any amount from the guarantor until the security property was sold; and 
3.  Had engaged in unconscionable conduct by starting to market the security property for a brief period and then did nothing for 18 months.

Harrison As J examined the terms of the guarantee and concluded (at paragraphs 46 and 47):

... it is my view that the second defendant has agreed ... that he had an obligation to repay the Bank the money without the Bank first seeking payment from [the borrower]. The second defendant has also separately indemnified the plaintiff against loss suffered by the Bank by virtue of the guarantee. The obligation of the second defendant to repay the money owing is an independent one that extends to the entirety of the debt ...

The second defendant has also agreed to terms that the Bank is not liable for any loss caused by the exercise, or attempted exercise of, failure to exercise, or delay in exercising a right or remedy, whether or not caused by its negligence and that the plaintiff will have full power to do all or any of the following: the taking of possession, receipt of rents and sale of the property

Her Honour found that the Bank had indeed done "very little" (paragraph 53; after about 18 months of almost complete inactivity - paragraph 67) to market or maintain the properties for a considerable length of time, but had more recently taken steps to sell the properties. The court noted that the Bank did not seek interest over the period it had taken little action; this factor must have been relevant in the ultimate decision of the court.

Counsel for the guarantor argued that the circumstances of the case were such that there had been a high level of moral obloquy by the lender, on the basis that it took possession of the property as security, and in failing to realise any of those properties for nearly 2 years, it prevented [the borrower] from taking steps to sell or improve the properties for sale and applying the proceeds of sale against what the Bank owed to the plaintiff. This action by the lender interfered with the guarantor's ability to cause [the borrower] to pay the plaintiff.

The guarantor relied upon an English Court of Appeal decision: Palk v Mortgage Services Funding plc [1993] Ch 330.  In that case, the mortgagee had taken possession of the security property, and proposed to do nothing for the foreseeable future, until the market improved. The consequence was that the guarantor in that case (Mrs Palk) may have had to pay for a shortfall if the market did not improve. The guarantor argued that the lender was speculating about the future of the property market at her expense.

The lender argued that it may choose which remedy it wishes to pursue and when, so long as it acted in good faith and not for some collateral purpose. It may choose the time of sale, however disadvantageous this may be for the mortgagor. If it decides to sell, it must exercise reasonable care to obtain the proper market value, but it is under no duty to exercise its power of sale. 

The Court of Appeal concluded under the heading "a duty to be fair": 

... a mortgagee can sit back and do nothing. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor.

Relying on Palk, the guarantor in Thompson argued that by doing nothing the Bank was in breach of an implied duty to be fair to a mortgagor, and its guarantor.

Her Honour considered the decision in Palk, but decided not to follow it for 2 reasons:
(a) while the Bank had been dilatory since taking possession of the Biloela property, at the time of the hearing it had taken steps to sell the property, in accordance with the guarantor's wishes; and 
(b) the prejudice that the guarantor suffered by the Bank's inaction had been ameliorated, because he was no longer obliged to pay interest on $1.9M that accrued over the period when the Bank was dilatory (due to a concession by the Bank about that issue, apparently on the last day of trial). 

In these circumstances, the court concluded that the conduct of the Bank over the delay period was not unconscionable.

Implication from findings 
The implication from the court's finding is that if the Bank had not waived its claim to interest for the extended period of its delay, it would have engaged in unconscionable conduct.

In the circumstances, it seems that lenders will be found to owe a duty to a borrower and its guarantors to act in a timely manner in selling security properties, or "a duty to be fair".


W G Stark
Hayden Starke Chambers

Mortgagee allowed to sell luxury mansion in Toorak - part of an ongoing saga

Property developer Warren Thompson and his corporations were involved in litigation over several years, seemingly as a result of the Global Financial crisis. Warren Thompson was apparently made bankrupt as a result of being unable to meet his obligations to lenders. 

The culmination of the litigation occurred in August 2013, when a dispute landed in the Supreme Court over luxury Toorak Road mansion Towart Lodge, which is sprawled over 165 squares and features five upstairs bedrooms with marble ensuites, its own cinema, a wine cellar with room for 1008 bottles and a six-car garage.

In Thompson v National Australia Bank Ltd [2013 VSC 400], the owner of Towart Lodge, Amanda Thompson, the wife of Warren Thompson, sought an injunction to restrain the National Australia Bank from taking possession of the property and selling it as mortgagee.

Photo: obtained from www.realestate.com.au 

Background 
The Bank claimed that Amanda Thompson defaulted on the mortgage in 2012 owing over $8 million.  By July 2013, with interest, the debt had grown to nearly $10 million.

On 9 July 2013, Mrs Thompson successfully sought a temporary injunction preventing the NAB from selling the property.

The dining room at Towart Lodge. 

The basis for the injunction was that Mrs Thompson had leased the property for $8000-a-week to Carlton Football Club board member Raphael Geminder and his wife, Fiona Geminder (the daughter of the late Visy chairman and billionaire Richard Pratt) for 2 years.

At some point after Mrs Thompson's default, the Geminders' rent was paid directly to the bank. 

Mrs Thompson claimed that the Geminders had also agreed to buy the property for $8.5 million, with an option for her to buy it back at the end of the lease. The judgment of Elliott J does not make it clear how the 2 year lease and the purchase and buy back agreement were to sit together.

Mrs Thompson was trying to negotiate a deal with the NAB that once the property was sold, the $8.5m would be paid in settlement of all the money owed to the NAB. 
The evidence before the court was that by July 2013, the Geminders no longer wanted to buy the property. They claimed there was no concluded agreement about the purchase.

As a part of her application for the injunction, Mrs Thompson also sought to enforce the purchase and buy back agreement against the Geminders. 

In refusing to extend the injunction beyond 5 August 2013, Justice Elliott said there was a real risk, particularly in relation to the value of the property.

Clearly, the property is a prestige property and there is a significant risk of the value of the property decreasing if an injunction were granted until the trial and determination of the proceeding [including any possible appeals].

At the time of the hearing, the bank had a buyer ready and willing to purchase the property for $8,550,000.

I accept that there must be a real risk that, if the sale to the alternate purchaser is not allowed to proceed in the near future, that prospective purchaser may not be either able or willing to acquire the property in the event that [Mrs] Thompson were unsuccessful at trial.

The only prejudice to Mrs Thompson was the loss of the option to buy the property back. Elliott J concluded that there was no evidence to show she would be able to do that in any event, given that Mrs Thompson and Warren Thompson appeared to be in a perilous financial position.

Conclusion 
The case is confirmation that the high end of the real estate market is still in a state of malaise in Melbourne, despite there having been some mild boom conditions throughout 2013 and early 2014. 

The case is also confirmation that the Supreme Court will usually be reluctant to restrain a mortgagee from acting on its rights to sell a property after default by a borrower unless the mortgagee's position can be secured in some other way (such as payment of the amount owed under the mortgage into court).

W G Stark
Hayden Starke Chambers  

When can a borrower challenge the lender's legal costs?

The Court of Appeal had to determine whether a borrower could challenge the legal costs charged by a lender's lawyers to the lender as a result of the borrower's default in Beba Enterprises v Gadens Lawyers [2013] VSCA 136.

Background   

A mortgagee entered into a loan agreement in 2009 with the borrower (‘Beba’) as mortgagor, pursuant to which $3 million was lent to Beba.

Under the loan agreement (and an associated fixed and floating charge) Beba was obliged, among other things, to:

(a) repay the principal of $3 million on or before 31 January 2009;

(b) pay interest on any sum in respect of which there was a default in payment, which sums could be capitalised at the option of the lender; and

(c) pay to the lender on demand ‘all costs, charges and expenses (including legal costs as between solicitor and client) reasonably incurred by [the lender] because of any default of [Beba]'. 

Inevitably, Beba defaulted on the loan, and the lender incurred in excess of $60,000 in legal and accountancy costs arising out of Beba's default.

Ultimately, after negotiations over several days and involving the parties’ lawyers and accountants, the lender and Beba entered into a compromise agreement to settle the dispute. Part of the compromise was that Beba would pay a contribution of $60,000 towards the legal and accounting costs incurred by the lender arising out of the default.

After paying the last instalment of the compromised sum, Beba sought a Costs Court review of the legal costs that the lender paid under Part 3.4 of the Legal Professional Act (“LPA”). 

A part of the review process was to seek orders that the lender's lawyers (Gadens) provide sufficient information (which may have included the provision of a copy of an itemised bill of costs) to allow Beba to consider whether to make application for review of the legal costs, or alternatively that Gadens fees be costs assessed.

Gadens opposed the orders sought on the bases that, first, the Costs Court had no jurisdiction in the circumstances, and secondly, the costs had been compromised and therefore Beba had no right to have the costs assessed. Associate Justice Wood of the Costs Court disagreed and purported to make orders against Gadens.

In the Supreme Court of Victoria, Emerton J allowed an appeal from Wood As J's decision. 

As to the jurisdictional question, Her Honour noted (at paragraph 23): 

Accordingly, the Costs Court has power to order the provision of itemised bills and the like for the purpose of facilitating a costs review, whether or not the costs review has been commenced at the time the order is sought or made.

Then, as to the substantial dispute about whether the costs had been compromised, Emerton J concluded (at paragraph 39):  

In my view, both the structure of the settlement agreement and the evidence about its negotiation make it clear that the parties to the agreement had in mind that the payment of $60,000 would conclusively resolve the issue of what costs [the lender] was entitled to recover as a result of the default and that it would not be open to one or other of them to re-open or revisit this question. The parties settled the question of costs in a way that made it very difficult to disentangle the legal costs from the other elements of the compromise package so as to enable the Costs Court to review the legal costs. The parties did not specify, and the Court cannot now know, whether the $60,000 that was paid was to be applied rateably across the fees of PPB Advisory and Gadens, or according to some other arrangement.  Although Beba now seeks review of only four bills of costs, its original summons appended 16 bills of costs from Gadens to [the kender]. In the circumstances, no particular item of legal costs could be identified as having been claimed and paid. If the parties intended that Beba retain its entitlement to have [Beba]’s legal costs reviewed by the Costs Court, the settlement agreement would have addressed how that could occur, given the difficulty arising from grouping together the legal and advisory costs and the fact that what was paid was described as ‘a contribution’, rather than a payment of the full amount of the legal costs or the full amount of the advisory costs.

Ashley JA (with whom Redlich and Priest JJA agreed), in the Court of Appeal, dismissed the appeal from Emerton J's decision. 

On appeal, Beba argued in effect that legally it could not contract out of its right to a review of the legal costs charged to the lender, and as a result, the compromise did not affect its right to seek such a review in the Costs Court.

The Court of Appeal rejected that argument. At paragraph 65 of Ashley JA's decision, His Honour stated:  

In my opinion, the judge was correct to conclude that s 3.4.48A did not preclude Beba entering into an agreement which finally compromised legal costs as between itself and the lender, such as to shut out its right to request information under s 3.4.38(7) and to apply for a costs review under s 3.4.38(2). That conclusion, I consider, flows from both the language of the present provisions, and historical development of the Act. 

The Court of Appeal also dismissed Beba's argument that there had been no accord and satisfaction between Beba and the lender, or alternatively between Beba and Gadens.

In the circumstances, it is clear that a third party payer (such as a borrower) does have a right to challenge the legal costs paid by the lender and passed on to the borrower under the loan agreement. However, if the parties reach a compromise, the right to review the legal costs should be expressly reserved if the borrower plans to later seek a review of the legal costs charged to the lender.

W G Stark
Hayden Starke Chambers

Review of the PPS Act 2014

The Federal government has announced a review of the Personal Property Securities Act 2009 (PPS Act). 

The Department has now invited submissions on issues particular to small business to be made before 6 June 2014. These will support an interim report aimed at informing government of priority issues affecting small business.

Feedback is being sought on issues such as the impact of the PPS Act on small business, the level of understanding of the PPS Act amongst small business operators and their ability to effectively utilise the PPS Act for their benefit.

The interim report will be provided to the Australian Government on 31 July 2014.

Submissions on all other issues can be made until 25 July 2014. A final report will be completed by 30 January 2015.

For more information about the review, to make a submission and subscribe for updates, please go to the PPS Act review web page on the website of the Attorney-General's Department. 

W G Stark
Hayden Starke Chambers

Lending to mature aged borrowers from 2013

On 17 September 2012, the Consumer Credit Legislation Amendment (Enhancements) Act 2012 ("the Enhancements Act") passed into law. The Act came into full operation on 1 July 2013.

Mature aged borrowers

My focus in this post is the effect of the Act on lending to mature aged borrowers, because among other things it brings into play new rules for dealing with hardship applications. 

There does not yet appear to have been any Supreme Court case law based upon this aspect of the amended legislation.  

I understand that some lenders have taken a cautious approach to lending to borrowers aged 45 or more because of the risk that those borrowers might retire prior to repaying their loan in full. For example, a standard 30 year mortgage will see 45 year old borrowers owing money until they are 75.

Due to the introduction of the new hardship provisions, lenders are concerned about borrowers approaching retirement (even if retirement age is deferred until 70!) with substantial outstanding principal sums and then making a 'hardship' application on the basis that they now have to sell their family home to repay the balance due to the lender.

Section 131(3) of the National Consumer Credit Protection Act originally provided that if a borrower could only comply with the borrower’s financial obligations under the contract by selling the borrower’s principal place of residence, it is presumed that the loan is ‘unsuitable’ unless the contrary is proved.

The situation has been further complicated by subsections 179(6) and (7) of the  National Consumer Credit Protection Act applying from 1 March 2013 due to their introduction in the Enhancements Act.  

The effect of the combination of these sections is that if a lender enters into a credit contract with security over the borrower’s principal place of residence and (to use the words of the section) the loan is ‘unsuitable’, a court is empowered to reconsider the loan. 

Alternative reverse mortgage loan available
If the court finds (in an application by the borrower, or ASIC) that at the time of the credit assessment for the loan there was a reverse mortgage which would have been suitable and available for that borrower (provided either by that or any other lender), then in effect the court can order the lender to make such a reverse mortgage loan to the borrower, allowing the borrower to reside in the place of residence possibly until death to prevent or reduce loss or damage suffered or likely to be suffered by the borrower vacating the home.  

Problems for lenders 
Lenders face two problems in this scenario: First they may be breaching the responsible lending provisions, and secondly, they may be subject to a court ordered long term occupant to whom they did not agree.

Lenders must therefore now carefully consider the type of loan that they are prepared to make to borrowers aged 45 or older. 

The regulations (in particular 209.71, which provides an example of a borrower who proposes to sell his home to fund repayment and states that the loan will not be unsuitable as the loan meets the borrower’s genuine requirements and objectives) may provide a basis for lenders avoiding this risk down the track.
Detailed evidence needed

Lenders and finance brokers will now need to obtain a written statement from each older borrower stating in some detail their intention to sell the security property when they can no longer make the repayments, and that this sale fits with their requirements and objectives. Perhaps caution requires a statement of an intention to 'down size' from the current family home on retirement to a smaller (and cheaper) retirement residence.

Conclusion 

It seems that the legislation is another potential, furtile ground for litigation against lenders in circumstances where any difficulty that a borrower faces in several (possibly many) years cannot have been foreseen at the time that the loan was made.

W G Stark
Hayden Starke Chambers