Wednesday 8 November 2023

Are there any more recent cases about a mortgagee's duty of good faith in selling real estate?

With interest rates continuing to rise in late 2023, it seems that we are likely to see more mortgagees taking steps to realise mortgaged property. 

On 2 June 2021, I posted about a Queensland decision (HSBC Bank Australia Ltd v Wang & Ors [2021] QSC 58) rejecting criticism of a mortgagee's conduct of a sale during the pandemic (see: 

On 17 January 2023, I posted about a Victorian Supreme Court decision (230V Harvest Home Road Pty Ltd v Joseph Salvo & Ors [2021] VSC 558) that found that the mortgagees there had not breached their duty of good faith in selling during the pandemic (see: 

On 18 January 2023, I posted about a Victorian Supreme Court decision (Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381) that found that the mortgagees there had not breached their duties under section 420A of the Corporations Act in their conduct of the sale of a security property during the pandemic (see: 

More recently, there is a decision by the Court of Appeal in New South Wales (Hung v Aquamore Credit Equity Pty Ltd [2022] NSWCA 272). 

In that case, Justice of Appeal Macfarlan gave the principal judgment. President Ward and Mitchelmore JA agreed, making the decision unanimous. 


Aquamore (the mortgagee) loaned $8.925m to First on First (the borrower). 

As security, the mortgagee obtained a mortgage from the borrower over a property in Blacktown, Sydney, and guarantees from its directors. Following the mortgagee's service of a purported notice of default (that was ultimately found to be invalid), the mortgagee took possession of the property with a view to exercising its power of sale as mortgagee. The property was ultimately sold for $10 million, no step having been taken by the mortgagor or the guarantors to restrain the sale.

Subsequently, the mortgagee sued for a substantial shortfall against the guarantors, and the borrower and guarantors cross claimed against the mortgagee, alleging a breach of the mortgagee's duty relating to the mortgagee sale. 

The trial judge (Meagher JA) found that: 

a. The mortgagee was not authorised to exercise its power of sale.

b. Despite finding a., the borrower had not proven that it suffered any damage due to the mortgagee's unauthorised exercise of the power of sale, as distinct from the mortgagee's alleged breaches of duty in conducting the sale.

C. The borrower had not proved that the mortgagee did not take all reasonable care in selling the property. 

The failure to prove a loss came about due to disputed expert evidence (the mortgagee's expert valued the property at $9,825,000; the borrower's expert at $15,000,000).

The NSW Court of Appeal dismissed an appeal that was based upon a submission that the trial judge had not provided adequate reasons for preferring the mortgagee's expert opinion evidence over the borrowers. The appeal also challenged the finding that the mortgagee did not breach its equitable and statutory obligations in the course of exercising its power of sale as mortgagee of the property.

In fact, the Court of Appeal found that the trial judge considered in detail whether the mortgagee had breached its general law or statutory obligations in exercising the power of sale. He referred to the general law obligation of a mortgagee exercising a power of sale to act in good faith and to the duty of care imposed by s 420A of the Corporations Act 2001 (Cth) (which was applicable to the mortgagee as it was a controller” within the meaning of that term as defined in s 9 of the Corporations Act).

At paragraph 72 of his judgment, Meagher JA concluded. 

Thus the principal question to be addressed is whether the mortgagee has taken all reasonable care in advertising and selling the property. What must be done to comply with that general obligation will ultimately depend on the circumstances of the particular case (Boz One Pty Ltd v McLellan [2015] VSCA 68 at [371]; (2015) 105 ACSR 325). A breach of the requirement to take all reasonable care is not established merely because a mortgagee fails to realise the property for its market value (Boz at [168]). The focus remains upon whether the process utilised to effect the sale was undertaken with reasonable care (Investec Bank [(Australia) Ltd v Glodale Pty Ltd (2009) 24 VR 617; [2009] VSCA 97] at [46]).

Ultiamtely, the Trial Judge reached the following conclusions on this topic (at paragraph 107):

Before selling the property, [the mortgagee] sought and obtained advice from [an experienced professional real estate agent] as to the manner in which the property might be sold and the price likely to be achieved assuming the marketing campaign [the agent] proposed. That advice was sought in the context of [the agent]) having undertaken an earlier sales campaign. In the light of [the agent’s] somewhat pessimistic description of the state of the market, the mortgagee is certainly not shown to have acted unreasonably in deciding to sell the property to [the proposed buyer] for $10 million.

108   The exchanges between [the mortgagee's director and the borrower's director and guarantor] in mid-December 2017 concerning the latter’s consent to a sale at that value do not suggest that sale was regarded by [the guarantor] as outside the market range at that time. Nor do the results of [the agent's] earlier marketing endeavours suggest otherwise. In the face of [the agent’s] advice as to the state of the market, [the mortgagee's] decision to sell for $10m, rather than proceed with a marketing campaign which the agent did not think likely to produce a higher price, was justifiable and reasonable. 

109    The valuation evidence confirms the reasonableness of that decision, in the sense that [the mortgagee's expert valuer] opinion, which I accept, assessed a market value which was less than the amount for which the property was sold.

The Court of Appeal emphasised that success in establishing an error by the trial judge in accepting one valuer's evidence over another would not of itself have led to the appeal being allowed. The Court then considered the judge's evaluation of that expert evidence and concluded there was no error in the analysis. 

The Court noted that the relevant legal principles are:

        ... a breach of the requirements to take all reasonable care [or to act in good faith] is not established merely because a mortgagee fails to realise the property for its market value. ..His Honour then referred to the statement of Palmer J (Mason and Ipp JA agreeing) in Stockl v Rigura Pty Ltd [2004] NSWCA 73 at [37] that [t]he test of good faith focuses primarily upon whether the mortgagee has seriously failed to take reasonable steps in all of the circumstances to obtain a proper price, and not upon what valuers may say the property should have sold for. An additional difficulty for the appellants in the present case is that, although the valuers expressed views as to the value of the property at the date of the mortgageefirst contract to sell (that is, 5 March 2018), both relied to a significant extent on sales, said to be comparable, that occurred after that date. 

The Court of Appeal noted that not only were post valuation date sales of doubtful or at least limited utility in establishing a breach by the mortgagee of a duty of good faith or the statutory duty to take reasonable care, but the appellants’ case in this regard also suffered from the problem that there was an absence of instructions to either valuer to consider the mortgagee's conduct in attempting to sell the property and the various communications it had with possible purchasers in the 12 months prior to the January 2019 sale (see Stockl v Rigura Pty Ltd [2004] NSWCA 73 at [31]–[34]; ACES Sogutlu Holdings Pty Ltd (in liq) v Commonwealth Bank of Australia (2014) 89 NSWLR 209 at 222; [2014] NSWCA 402 at [65]). Nor were those matters the subject of evidence from any other experts.

There have been very few successful challenges by a borrower or a guarantor to a sale by a mortgagee as being in breach of the mortgagee's duty. This is yet another example of the types of hurdles that need to be overcome to achieve success.  

WG Stark 
Owen Dixon Chambers

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