The usual requirement in order to restrain a mortgagee sale is that a borrower must pay into Court the amount owed under the mortgagee’s security, even if that amount is disputed (according to the High Court decision in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161).
As is the usual outcome in these types of cases, Dixon J refused the borrower's application.
Pearl Beach (the borrower) was the registered proprietor of land at Point Nepean Road, Dromana. The land was purchased by it as an investment or development opportunity. The borrower obtained a mortgage from Wisewoulds Nominees Ltd ( the lender) securing an initial advance of $3.2 million. The borrower defaulted in repayment of that loan and the lender obtained a judgment for possession of the property and took possession. A notice to pay under s 76 of the Transfer of Land Act 1958 was served. Once the lender took possession of the property, a mortgagee’s auction was scheduled for 12.00 noon on 21 March 2014.
The borrower believed the value of the security property was approximately $5 million. Despite that, the lender's selling agents had advertised the security property for auction with an expected selling price range of $3.9 - $4.2 million.
While the lender was in possession, and on the day before the auction, the borrower purported to arrange a sale of the security property to a third party company for $5 million. Despite the purported sale, the mortgagee continued with the mortgagee sale and refused to accept the borrower's sale.
On the day of the auction the borrower sought an injunction to restrain the lender from proceeding. The borrower alleged that the lender was in breach of its duties as a result of marketing the security property in a price range that was less than the valuation, and in refusing to agree to the sale with the third party.
In refusing the injunction, Dixon J noted that the borrower had not provided enough proof that the lender had breached any of its duties.
One matter that his Honour observed was that 'underquoting' does not necessarily indicate that a property will sell at an undervalue at an auction, on the basis that it is a technique often used by agents to attract buyers to an auction.
His Honour dealt with the issue of underquoting in this way:
Underquoting is a practice that, for other reasons, attracts criticism and it has been the subject of some legislative attention. Those criticisms are usually advanced by purchasers rather than vendors. Because it is, apparently, the objective of marketers to attract buyers to the property by underquoting in advertising, it does not follow that the property is likely to be sold at an undervalue at an auction. Vendors usually appreciate the efforts of estate agents to attract the attention of potential purchasers to the sale. The apparent enthusiasm of estate agents for underquoting, and the reasons for it, may be well appreciated by a mortgagee. Equally, serious purchasers may allow for underquoting in assessing an advertised range. At its highest, it is a matter that might require some consideration when evaluating all of the circumstances of the conduct of the sale.
In this case, there was no suggestion that the borrower had any ability to pay the amount owing under the mortgage into court as security for the injunction that was sought.
The case is a recent example (in a long line of cases) confirming how difficult it is for a defaulting borrower to restrain a lender from selling a security property at auction.
W G Stark
Hayden Starke Chambers
Hayden Starke Chambers