...recklessly or wilfully sacrifice the interests of the mortgagor.
Recklessness would be demonstrated by a mortgagee who failed to take:
...obvious precautions to ensure a fair price and was careless as to whether one was obtained (at CLR 680).
In this case, the borrowers alleged that was exactly what happened in the circumstances.
The lender on the other hand argued that merely because valuation evidence indicated a higher market value did not establish that there was a serious question to be tried as to a breach of the duty of good faith.
The borrower's complaint was essentially that the marketing period was truncated because the applicant accepted the second respondents’ offer within weeks of the auction. The judge concluded (at paragraph 27) that there was not an arguable case that, in doing so, the lender breached its duty of good faith.
The Court concluded that this case was an instance in which, given the extensive advertising and marketing of the property prior to the auction, the sale price which the mortgagee was able to achieve was a better guide to market value than the valuation evidence.
The Court also noted that a sale at an inadequate price does not demonstrate a lack of good faith. It is necessary to show that the mortgagee’s failure to take reasonable steps to obtain a proper price was so serious as to be characterised as unconscionable conduct.
The mortgagee had accepted the offer of $5,510,000 in a context in which its own valuer had valued the property prior to the auction (at the lower end) at $5,000,000.
The court pointed out that a mortgagee is “...entitled to sell at the time of his choice and without waiting for a time which a selling owner might consider more propitious” And, indeed, there was no reason to suppose that a more propitious time was pending.
The judge found that the lender sold at a time when, with international borders closed and state borders being closed to different regions at different times, there was no reason to suppose that any improvement in the market was imminent.
It seemed that at the time of the sale, buyer sentiment was becoming more unfavourable.
The judge concluded at paragraph 33 that in the context of the mortgagee’s efforts to sell and the uncertainty of conditions, neither the low price achieved nor the failure to wait can conceivably justify an inference that the applicant acted other than in good faith, and there was nothing to support the contention that the lender was not acting in a genuine belief that accepting the offer was in the best interests of all concerned, including the borrowers.
The Supreme Court of Queensland also concluded that the balance of convenience tipped against allowing the caveat to remain in place. The borrowers did not want to retain the property; instead they urged its sale.
Further, they did not pay into court the arrears owing on the mortgage so as to provide the lender with certainty of recovery. It seemed probable that the mortgagee would, if it had to re-sell at the time of the hearing, achieve at least a price which would meet the amount secured, but there was some risk that it would encounter difficulty finding another buyer within any reasonable time frame.
Whilst the caveators gave the usual undertaking as to damages, they were in China at the time of the hearing (not Australia) and there was no evidence at all as to their means of meeting such an undertaking.
Indeed, the Court found that it would seem to follow that if they had means available in this country they would have taken steps to negotiate some arrangement with the lender concerning the arrears of the debt so as to prevent the property’s sale; but nothing of the sort occurred.
The purchasers had taken various steps towards moving from their home in Sydney to the property, and enrolled their son in a school, which he then attended, in its vicinity.
One of the purchasers remained in Sydney with possessions still packed and waiting to be transported, while the other purchaser and their son were living in temporary accommodation at the Gold Coast. They remained ready and willing to complete the contract.
The Court accepted that the purchasers faced considerable inconvenience should their purchase not proceed.
First, a low sales price will not of itself demonstrate a lack of good faith. The mortgagee's conduct must be so unreasonable as to rise to the level of unconscionable conduct.
Secondly, in light of the uncertainty and significant market disruption in 2020 as a result of the pandemic, the price offered and accepted for the property was better evidence of the property's market value than the valuations obtained by the respective parties.
It seems in these difficult economic times that we are likely to see more actions by lenders in taking possession of, and selling security properties.
Whilst borrowers are unlikely to be satisfied about the results of a mortgagee's auction, it seems that it will be very difficult for a borrower to establish a lack of good faith where the only issue is the low sale price achieved by the lender.
Hayden Starke Chambers