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
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