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