Are there any recent Victorian cases about a mortgagee's duty of good faith in selling in a pandemic?

Further to my post (see: https://melbournepropertylaw.blogspot.com/2021/06/are-there-any-recent-cases-about.html) about a decision of the Supreme Court of Queensland about a mortgagee's duty of good faith in selling in a pandemic, the Supreme Court of Victoria has now had to deal with the same issue. 

Matthews As J in 230V Harvest Home Road Pty Ltd v Joseph Salvo & Ors [2021] VSC 558 heard an application for summary judgment and concluded that the plaintiff had no real prospects of success on its statement of claim. As a result, summary judgment was granted in favour of the defendants/mortgagees. 

The claim related to the enforcement by the mortgagees of a $1.7m loan that they made to the Plaintiff, secured by a first registered mortgage over the property located in Harvest Home Road, Wollert (‘Property’). The Property was approximately 3,900 square metres of vacant land that was suitable for residential development.  After purchasing the Property, the Plaintiff obtained a planning permit for the construction of 18 townhouses on the Property.

The loan and accrued interest were due to be paid by 21 December 2019.  The Plaintiff failed to do so.  The mortgagees served a notice pursuant to s 76 of the Transfer of Land Act 1958 (Vic) (‘TLA’) on the Plaintiff or about 15 January 2020. 

After the notice was served, the Plaintiff advised the mortgagees that it had sold the Property for $2.5m plus GST. Unfortunately, this sale did not complete. 

On 6 June 2020, the mortgagees exercised their power of sale and sold the Property for $1.9m plus GST, with settlement due on 7 August 2020.  Settlement occurred after the Plaintiff’s application for an interim injunction to prevent settlement from occurring was dismissed.

In the claim, the Plaintiff alleged that the mortgagees did not:

(a)                Act in good faith and have regard to the interests of the Plaintiff by selling the Property for $1.9m which was substantially below the value of the Property;

(b)               Take reasonable steps to obtain the best price for the Property which was valued up to $2.4m; and

(c)                Have regard to the interests of other encumbrancers including a subsequent mortgagee and caveators.

At paragraph 43, Her Honour noted: 

"The key questions in this proceeding concern the Mortgagee Sale and whether the [mortgagees] breached their duties as mortgagees [of good faith in conducting the sale of the Property], causing loss and damage to the Plaintiff."  

The evidence before the Court included the following:

In March 2020, the mortgagees obtained a valuation of the Property in the range of $1.8m to $2m from the real estate engaged to sell the Property. The agent asserted that the sale price of $1.9m plus GST was market value, perhaps even higher than market value in the then current climate, and was the best offer made to purchase the Property.

The auction (scheduled for 4 April 2020) was cancelled due to the restrictions imposed by the Victorian government due to the COVID-19 pandemic, and the mortgagees instructed the agent to instead sell the Property by private treaty. 

The mortgagee sale was an arm’s‑length contract, the mortgagees and the purchaser were not previously known to each other nor had any previous association, and were introduced by the real estate agent. 

In addition to the offer which was accepted by the mortgagees that led to the contract, the following offers were made and rejected:

(a)                $1.8m, subject to certain conditions in favour of the prospective purchaser, with settlement in October 2020;

(b)               $1.81m including GST, subject to strict conditions in favour of the prospective purchaser; and

(c)                $1.9m, subject to the prospective purchaser obtaining finance, with settlement not before 15 October 2020.

The amount owing by the Plaintiff to the mortgagees was $1,878,500 plus the costs of enforcing the Loan Agreement and the Mortgage. There was also an outstanding costs order in the mortgagees' favour arising from the earlier failed injunction application by the plaintiff. The mortgagees demanded $115,329.49 from the Plaintiff and from a guarantor, which was alleged to be the shortfall following the settlement of the Mortgagee Sale, which was not paid at the date of the hearing.

The plaintiff asserted that February Sale fell through as the purchaser’s bank would not lend at a high enough leverage-to-value ratio as was necessary for the purchaser to settle the purchase of the Property. 

The plaintiff intended to try and get a further extension from the mortgagees for this purchaser, who was seeking to obtain private alternative finance, or find a new buyer at the same price or to refinance the Property. 

Appraisals obtained by the plaintiff valued the Property between $2.1m and $2.4m.

The mortgagees argued that they had, in the circumstances of the case and the current COVID-19 epidemic, obtained the best price consistent with their entitlement to realise its security. 

There was no allegation that the purchaser has acted otherwise than bona fide and in his own best interests.  

The Plaintiff submitted that by selling the Property for $1.9m, which is below the appraisals made by three real estate agents around that time, the mortgagees sold the Property at an undervalue.  This was said to be an undervalue of between $300,000 and $500,000 based on those appraisals, or $600,000 when compared with the February Sale. 

The Plaintiff submitted that there is no evidence that the mortgagees or their real estate agent obtained an expert independent valuation prior to the sale, which failure was said to be contrary to standard practice in mortgagee sales and for the sale of undeveloped land.  It also said that providing a price range in the absence of an auction created an artificial ceiling on the price of the land. 

The Plaintiff asserted that the absence of an independent valuation and the evidence of the Property being sold at substantially undervalue pointed to a breach of the mortgagees’ duties in exercising their power of sale.  

Her Honour rejected the Plaintiff’s submission that the onus was on the mortgagees to show that they had satisfied their duties under the TLA and that the Plaintiff has nothing more than a fanciful chance of success.

At paragraph 91 of the judgment, Matthews As J concluded that the onus is not on the mortgagees to disprove the Plaintiff’s case by positively proving their own case.  The onus is on the mortgagees to show that the Plaintiff’s case has no real prospect of success, which the Plaintiff can refute by showing cause to the contrary. 

At paragraph 93, Her Honour proceeded:              

"Hence, rather than the [mortgagees] having the onus of showing that they have satisfied their duties as mortgagees, the question is whether there is sufficient evidence before the Court that the allegation that the [mortgagees] have breached their duties as mortgagees has a real prospect of success. 

The evidence relied upon by the mortgagees established that a conventional marketing campaign was undertaken.  There was nothing unconventional about the marketing material or the marketing channels; rather, the usual methods of selling land were employed.  This included advertising on commercial and development focused websites.

Having embarked upon a conventional marketing campaign in early March 2020, the mortgagees were then confronted with "exceptionally unconventional circumstances".  By mid to late March 2020, the state of Victoria was in lockdown due to the COVID-19 pandemic.  It was hardly surprising that in those circumstances, the auction of the Property which had been scheduled for 4 April 2020 was cancelled.  It was also hardly surprising that the mortgagees instructed the real estate agent to proceed to attempt to sell the Property by private treaty." 

At paragraph 100, Matthews As J noted:

"I do not see how it can be said that these actions constitute a breach of the mortgagee’s duties.  The auction could not physically be held, and a mortgagee is not obliged to wait until market conditions improve before conducting a mortgagee sale. A mortgagee has an entitlement to realise its security, provided that it abides by its duties in doing so. The duty to take reasonable steps to obtain the best price is a duty to take appropriate steps in the circumstances which are consistent with its right to enforce its security interest."

At paragraph 102 and following, Her Honour stated:           

"That really leaves the question of whether the Property was sold by the [mortgagees] at an undervalue.  While I accept that there is no evidence to explain how [the real estate agent] came to a range of $1.8m to $2m when advising the [mortgagees], the only evidence that this is an undervalue is that contained in the [the plaintiff's director's] Affidavit.  The fact that the Plaintiff had entered into the February Sale at $2.5m plus GST is not indicative of $1.9m plus GST being below market value, as the purchaser under that contract was unable to complete [the sale] due to an inability to obtain finance at that price.  I do not see how a failed contract can be said to be indicative of market value.  There is no evidence at all to support [the plaintiff's director’s] own view of value, being $2.475m to $2.7m, as he simply does not give any evidence to show how he came to that range.

The selling real estate agent's appraisal was followed by a marketing campaign and by offers made which were rejected.  The Plaintiff says that the marketing campaign put a range of $1.9m to $2.09m on the Property.  First, there [was] no evidence before [the Court] as to that other than [the plaintiff's director’s] statement: there is no document exhibited that shows this was the range stated in the marketing material.  Even if [the plaintiff's director’s] evidence in this regard is accepted, and I have no reason not to accept it given that the mortgagees could have contradicted it if they had felt the need to, there is no evidence before me that putting this range on the marketing material constitutes bad faith or a failure to obtain the best possible price.  Second, [the plaintiff's director’s] states that once the mortgagees advertised it at this price, “no one was willing to buy the property at what it was worth because it was now being advertised for $600,000 less”.  I do not accept this.  There is no evidence to support the finding that this was $600,000 below market value, and in any event this is opinion evidence which is inadmissible as [the plaintiff's director’s] is not an expert.  There is no evidence to state that putting the range that the real estate did put on the Property constitutes a failure to obtain the best price.  Having given the range of $1.8m to $2m to the mortgagees, it was entirely consistent for the real estate agent to have stated that range in the marketing material. 

Importantly, the evidence is that there was a significant amount of interest in the Property, but that interest manifested in only four offers (the three described above and the one which was accepted), all roughly within the price range given to the mortgagees.  Of the rejected offers, two were at the bottom end of the real estate agent's valuation and all three were on terms less favourable than the offer which was ultimately accepted.  Further, it is not as if the Property was sold to the first offeror or that it was on the market for a brief period of time.  The evidence is that the Property was on the market for about 3 months before the mortgagees accepted the best offer they had received in that time.

The evidence was that after the Mortgagee Sale, there remained a shortfall in the amount owing to the mortgagees of at least $115,329.49.  This supports the position that the mortgagees accepted the best available offer to them at the time.

At paragraph 107, Matthews As J did not accept that the Plaintiff has demonstrated that its claims that the mortgagees failed to abide by their duties as mortgagees when exercising their power of sale have a real prospect of success.

In the Injunction Application, the Court had already held that the Plaintiff had not established it had a prima facie case.  The Plaintiff’s evidence being no better than it was then, if a prima facie case had not been established at the time of the Injunction Application, her Honour found it difficult to see how it could then be said that the Plaintiff’s case has a real prospect of success.

Conclusion

In the circumstances of this case, it is clear that a borrower will have great difficulty in establishing that a lender has not acted in good faith simply by selling a security property during the COVID-19 pandemic. 

A borrower will need to establish a lack of good faith in the sale, something which is not made out simply by proving that the sale was at an under value (although that was not in fact proven in this case). 

WG Stark 

Hayden Starke Chambers

Are there any recent cases about a mortgagee's duty under section 420A of the Corporations Act when exercising their power of sale during the pandemic?

Readers will recall that I posted about a Queensland decision that dealt with a mortgagee exercising its power of sale during the pandemic (see here: https://melbournepropertylaw.blogspot.com/2021/06/are-there-any-recent-cases-about.html). 

Yesterday, I posted about the Supreme Court of Victoria dealing with a similar scenario (see: https://melbournepropertylaw.blogspot.com/2023/01/are-there-any-recent-victorian-cases.html). 

In Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381, M Osborne J dealt with a dispute about whether the mortgagee in that case had exercised its power of sale in accordance with section 420A of Corporations Act 2011 (Cth).  

The lender advanced $6.39 million pursuant to a loan agreement.  The borrower mortgaged land at 2–10 Springvale Road, Springvale and 1690 Centre Road, Springvale (‘the Property’) as security for the Loan.  The second defendant provided a personal guarantee and indemnity in support of the Loan and further charged his interest in a property located at 6 Raymond Road, Seaford as security for the loan.  After the borrower fell into default under the Loan Agreement, the lender exercised its rights as mortgagee to enter into possession of the Property.  The lender subsequently sold the Property for $7 million pursuant to a contract of sale dated 22 December 2020.  The sale settled on 23 March 2021.  The principal and interest owed on the Loan exceeded the proceeds of sale from the Property.

The lender commenced proceedings against the borrower seeking the repayment of outstanding debt after the lender (as mortgagee in possession) sold the security property just subsequent to Melbourne’s second pandemic-induced lockdown in 2020 and the proceeds did not satisfy the mortgagee's debt. 

The borrower admitted default under the loan agreement and accepted the outstanding debt. However it counterclaimed against lender, contending that sale of the property breached the duties imposed by section 420A. The counterclaim alleged that if the lender had complied with section 420A of the Corporations Act, it would have achieved a sale price of $7.8 million (the market value outlined the borrower's expert evidence) leading to the secured debt being satisfied in full. 

The Court considered whether the best price had been obtained in exercising power of sale in circumstances where the price achieved was less than the outstanding liability to mortgagee. The court also considered the effect of COVID-19 lockdowns on property market.

Justice M Osborne noted that the parties agreed on the relevant legal principles to be applied, summarised by the Court of Appeal in Boz One Pty Ltd v McLellan [2015] VSCA 68 (Whelan, Santamaria and Kyrou JJA):

As the authorities illustrate, what must be done to comply with this general obligation will depend on the circumstances of each case, including the nature of the assets being sold and the circumstances of the chargor. In deciding whether a controller’s failure to take a particular step constitutes a breach of s 420A(1)(a), that step should not be considered in isolation. Rather, the court should consider the controller’s conduct as a whole in the context in which the controller was required to make decisions about which steps to take and which steps not to take. The controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time.

Here, the ‘dynamic circumstances that the lender faced at the relevant time' were the COVID-19 pandemic and associated lockdowns. Therefore (as always) the crucial issue was the steps taken by the lender to sell the property.

The essence of the borrower’s case was that the mortgagee contravened s 420A of the Act by failing to take all reasonable steps to sell the Property for market value.  In particular, the borrower alleged that:

(a) the sales campaign was too short;

(b) the proposed advertising strategy was inapt in that it gave undue prominence to the fact of the sale being a mortgagee sale; and

(c) the mortgagee should have extended the campaign into 2021 in light of the quality of the offers that it had received rather than entering into the Sale Contract.

M Osborne J noted at paragraph 13 that:

"Whilst it is clear that s 420A of the Act imposes a more rigorous statutory duty upon a mortgagee or other receiver in relation to its power of sale than that provided by the general law duty of good faith (Boz One Pty Ltd v McLellan [2015] VSCA 268 at [157]), the more rigorous duty imposed by s 420A does not detract from the common law principle that a mortgagee may sell at the time of its choosing and does not have to wait until a time when a better price might be obtained (Investec Bank (Australia) Ltd v Glodale Pty Ltd [2009] VSCA 97; (2009) 24 VR 617, 627 [48] (Neave and Redlich JJA and Forrest AJA)."

Justice M Osborne made the following relevant findings:

The four-week expression of interest sales campaign was entirely adequate, if not best practice, in the circumstances.

The agents employed were experienced real estate agents, with expertise in development sites in inner suburban Melbourne.

The sales campaign attracted considerable interest. The evidence was that prospective buyers did not withdraw because they did not have sufficient time to undertake an assessment of the property (due to COVID-19 restraints). Rather, they withdrew because they were told that the vendor was seeking a price of $7 million or more, where the buyers’ interest was generally at a price of up to $6 million.

The sales campaign obtained the $7 million sale in a difficult and unpredictable market, which was within the range of the agent’s estimate and exceeded the market value as assessed in the valuation obtained from an independent expert prior to entering into the sale contract.

There was no breach of section 420A of the Act by not extending the sales campaign – the expert evidence preferred by the Court was that readvertising in 2021 would suggest to the market that the late 2020 sales campaign failed, removing the competitive tension from the sales process. In addition, it would result in significant risk, noting the additional interest accruing under the loan (about $110,000 to $130,000 per month). 

The emphasis in the advertising campaign on the fact of the mortgagee sale was entirely consistent with usual practice and had obvious commercial advantage – The evidence (of the lender's experts) that it is common for properties to be advertised as mortgagee sales, indicating a motivated vendor and is not simply testing the market was preferred. One of the experts considered that this was particularly appropriate for the property during the COVID-19 lockdown and opined that without a mortgagee sale tag, it may have been perceived by many in the market that the vendor had an elevated view of the property’s worth.

Justice M Osborne considered the expert valuation provided by both parties, and although he accepted the lender's experts' evidence, in fact one of the borrower's experts was not very different from the ultimate sale price (having given a range of $7,260,000 to $8,300,000). Despite that range, the borrowers asserted that the valuation showed that the security property was worth $7.6m. The Honourable Justice dismissed that assertion as an oversimplification. He also noted at paragraph 78:

"Valuation is often described as an art, not a science, and it is well understood that two valuers acting competently could come to different conclusions as to the value of a particular property on a given day.  Absent any challenge to each valuer’s choice of comparable sales which did not occur in the present case, I am not in a position to prefer the evidence of one over the other.  Rather, I conclude that the difference between their two valuations is simply a product of reasonable judgment by appropriately qualified persons." 

Conclusion

This decision is a further example of the difficulties faced by a dissatisfied borrower in trying to pursue a claim against a mortgagee alleging failure to comply with its legislative duties. The Court emphasised that the mortgagee’s conduct as a whole will be considered with reference to the ‘dynamic circumstances’ faced when determining if the duty under section 420A has been complied with. 

Obtaining contemporaneous valuations, using reputable agents and carefully considering independent advice from those agents will carry considerable weight in the face of borrower dissatisfaction without much more.

WG Stark

Hayden Starke Chambers

Can an Owners Corporation pass a rule that prevents a particular use of a lot in Victoria?

It is relatively common for Owners Corporations to seek to restrict the use to which a lot in a building subject to a subdivision can be put. 
 
Both the Supreme Court of Victoria and the Victorian Civil and Administrative Tribunal have found that an owners corporation rule seeking to prohibit a particular type of use of a lot is an invalid rule which is beyond the owners corporation’s rule making power provided for by the Owners Corporation Act 2006 (Vic) (Act).

For example, in Lawandi v Owners Corporation 21842D (Owners Corporations) [2015] VCAT 1810 (20 October 2015), the owners corporation sought to prevent the Applicant from using the relevant premises for residential purposes in a building which was primarily used for commercial purposes. 

The owners corporation introduced a new rule by Special Resolution which provided:

A lot owner or occupier must not use the lot, or permit it to be used, for residential or other accommodation, whether short term, long term or otherwise.

In considering the rule, the Tribunal closely considered the wording of section 138 of the Act and Schedule 1 of the Act. 

VCAT Vice President, County Court Judge Davis, found that the matters which an owners corporation may make rules about are confined to the subject matter in Schedule 1 of the Act. 

Clause 5 of Schedule 1 of the Act (relating to lots) was found to enable an owners corporation to make rules regulating the external appearance of lots or activities being carried out on a lot so far as they impact on common convenience or common areas, but did not extend to prohibiting a particular use of a lot.

Vice President Judge Davis found:

[T]he power under the Act in an OC to make rules “for and with respect to” a “change of use of a lot” cannot be construed to allow an OC to make a rule prohibiting the change of use of a lot.  Rather, the power is to be construed as a power to make rules for and in respect of any change of use of a lot that are necessary for the carrying out of its functions under the Act.

Rules limiting types of uses within buildings affected by owners corporations are common in inner city developments. 

However, it seems that attempts to restrict the use of a lot in are likely to be ineffective (for example the Republic Tower at 299 Queen Street, Melbourne (the subject of Morrish v Republic Tower Body Corporate [2004] VSC 56) and the Watergate Building in the Docklands (the subject of Owners Corporation PS501391P v Balcombe (Owners Corporations)[2015] VCAT 956)). 

The cases have important ramifications for owners corporations and members of owners corporations. 

Careful consideration needs to be given about the potential invalidity of any owners corporation rule which seeks to prohibit a lot from being used for a particular purpose, such as a residential use or a commercial use, and a member’s obligation to comply with a rule of this nature.

WG Stark

Hayden Starke Chambers