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: https://melbournepropertylaw.blogspot.com/2021/06/are-there-any-recent-cases-about.html). 

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: https://melbournepropertylaw.blogspot.com/2023/01/are-there-any-recent-victorian-cases.html). 

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: https://melbournepropertylaw.blogspot.com/2023/01/are-there-any-cases-about-mortgagees.html). 

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. 

Background

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 P 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 mortgagee’s first 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.

Conclusion 

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

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 parties to a mortgage agree to contract out of the statute of limitations?

1. In Price v Spoor, [2021] HCA 20, the High Court handed down a decision on 23 June 2021 about whether the parties to a mortgage could agree to contract out of the operation of the Queensland equivalent of the Limitation of Actions Act, 1958, and whether such an agreement was contrary to the public policy underpinning the Act.

Background facts

2. On 2 July 1998, Law Partners Mortgages P/L loaned $320,000 to Alan Leslie Price, Allana Mercia Price, James Burns Price and Gladys Ethel Price.

 

3. To secure the loan, Alan Leslie Price and Allana Mercia Price mortgaged land that they owned at Minden, west of Brisbane and Rosewood, near Ipswich in Queensland to Law Partners Mortgages P/L, and James Burns Price and Gladys Ethel Price mortgaged land that they owned at Tallegalla, near Ipswich in Queensland to Law Partners Mortgages P/L. 

4. The loan was not repaid on the due date, 2 July 1999. The parties negotiated a further agreement by which, among other things, the loan was extended to 2 July 2000.

5. A part of the mortgaged land was sold in November 2000, resulting in payment of accrued interest, legal costs, and a reduction of the principal loaned by $50,000. As at April 2001, the principle outstanding was therefore $270,000. 

6. Christine Claire Spoor and Kerry John Spoor were the trustees of a small pension fund. They became the mortgagees as successors in title to Law Partners Mortgages P/L.

7. In 2017, the mortgagees served notices under the Queensland Property Law Act requiring repayment of the principal, and accrued interest. They claimed over $4 million, including interest at the rate of 16.25% per annum, compounded monthly.

8. After the notices expired, the mortgagees sued the borrowers for repayment of the money loaned (plus interest) and sought to recover possession of the remaining security properties. 

9. The borrowers contended that the mortgagees were statute-barred from enforcing rights under the mortgages as a result of the expiry of the relevant time period under Queensland equivalent of the Limitation of Actions Act, 1958. 

10. Two of the borrowers further pleaded that the mortgagees’ titles under the mortgages had been extinguished pursuant to a provision in the Act, which provides, in effect, that where the time prescribed by the Act within which a person may bring an action to recover land has expired, the person’s title to that land “shall be extinguished”.

11. The mortgagees replied that the borrowers did not have the benefit of the Act as they had agreed, pursuant to clause 24 of the mortgages, that they would not plead any defence under the Act in proceedings to enforce the mortgagees’ rights as mortgagees.

12. Clause 24 was in the following terms:

RESTRICTIVE LEGISLATION

The Mortgagor covenants with the Mortgage[e] that the provisions of all statutes now or hereafter in force whereby or in consequence whereof any o[r] all of the powers, rights and remedies of the mortgagee and the obligations of the Mortgagor hereunder may be curtailed, suspended, postponed, defeated or extinguished shall not apply hereto and are expressly excluded insofar as this can lawfully be done.

Queensland Supreme Court

13. At first instance, Dalton J in the Supreme Court of Queensland [see [2019] QSC 53] refused the mortgagee’s application to strike out the borrowers’ defence as it related to the Statute of Limitations, and as a result entered judgment for the borrowers on the basis of their defence that the Statute of Limitations applied. Later, her Honour also made orders for the execution by the mortgagees of releases of the two mortgages. 

Queensland Court of Appeal

14. The Court of Appeal of the Supreme Court of Queensland (Gotterson JA with whom both Sofronoff P and Morrison JA agreed) [see (2019) 3 QR 176; [2019] QCA 297] allowed the mortgagees’ appeal, overturned the trial judge’s orders and gave judgment for the mortgagees in reasons handed down on 17 December 2019, later including ancillary orders for possession of the security properties. 

15. At paragraphs 18 to 19 of Gotterson JA’s decision, he noted that: 

[18] Accordingly, in the view of the learned primary judge, there was no reason to doubt the validity of a borrower’s promise in a loan or mortgage document never to raise a limitations defence to an action to recover monies due to the lender. However, her Honour drew a distinction in the case of a promise not to raise a limitations defence in an action to recover possession of land.

[19] In summary, relying on observations of Mason CJ in Verwayen, the learned primary judge reasoned that a provision such as s 10(1)(a) of the Limitations Act conferred a benefit upon an individual in the nature of a statutory right to plead a certain defence, which could be waived. By contrast, s 24(1) thereof operated to extinguish rights, and not merely to confer a benefit. Hence, her Honour held, it was not open to parties to contract against the operation of that section. Further, here, s 24(1) had operated to extinguish the mortgagee’s title to the mortgaged land before the current proceedings had been commenced. Thus, clause 24 was incapable of altering the extinguishment of that title. 

16. At paragraph 34 of the Court of Appeal’s decision, Gotterson JA noted:

There appears to be no Australian authority in which separate consideration has been given to whether a contractual provision not to plead a limitations defence entered into for consideration before a cause of action to which it might be pleaded has arisen, is void as against public policy. However, judicial observations at the highest level in this country suggest that such a provision is not, for that reason, void.

17. Further, at paragraph 36 (emphasis added):

In [Verwayen], Brennan J said of the “right” … that it was introduced solely for the benefit of a defendant who must plead it before it is effective and who may waive it. Consistently with this, French CJ, Crennan, Keifel and Bell JJ in Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54; (2012) 247 CLR 129 at 143-144 more recently said:

... a person upon whom a statute confers a right may waive or renounce his or her rights unless it would be contrary to the statute to do so. It will be contrary to the statute where the statute contains an express prohibition against ‘contracting out’ of rights. In addition, the provisions of a statute, read as a whole, might be inconsistent with a power, on the part of a person, to forego statutory rights. It is the policy of the law that contractual arrangements will not be enforced where they operate to defeat or circumvent a statutory purpose or policy according to which statutory rights are conferred in the public interest, rather than for the benefit of an individual alone. The courts will treat such arrangements as ineffective or void, even in the absence of a breach of a norm of conduct or other requirement expressed or necessarily implicit in the statutory text.

18. And at paragraph 38:

As both Mason CJ and Brennan J expressed it, what is conferred by a limitations statute is a right on a defendant to plead as a defence the expiry of a limitation period. The right is conferred on a defendant as an individual. As such, an individual may contract for consideration not to exercise the right, or to waive it, as a defendant.

19. At paragraph 64 of the judgment, after analysing the High Court’s decision in Verwayen dealing with the waiver of reliance on the statute of limitations in that case, Gotterson JA concluded:

These statements are, to my mind, illustrations that according to ordinary usage, the word “defeat” aptly describes the effect of limitation provisions.

20. At paragraphs 65 to 66, the Honourable Justice of Appeal concluded:

I infer from these references that their Honours considered that a limitation provision was the means whereby the cause of action was defeated, notwithstanding that it was for a defendant to plead it for that to happen. In other words, they did not consider that a need for the provision to be triggered by a pleading of it has the consequence that the provision is not the means by which the cause of action is defeated.

Unlike the learned primary judge, I have, therefore, concluded that clause 24, according to its terms, does apply to provisions in the Limitations Act by which the enforcement of a right, power or remedy of the mortgagee might be defended by the mortgagor and thereby defeated. Relevantly, those provisions include ss 10(1)(a), 13 and 26(1). 

21. The final finding of the Court of Appeal was in paragraph 76, as follows:

It follows that the [mortgagees]’ titles as mortgagee will have been extinguished under s 24(1) only if the s 13 period of limitation has expired in respect of them. In my view, it has not in this case. That is because, consistently with these reasons and as it was open to the parties to agree, clause 24 has at all times operated to exclude s 13 from applying to the mortgages. Thus, as between mortgagor and mortgagee, the period of limitation prescribed by s 13 has never applied and hence has never expired.

22. In those circumstances, the appeal was allowed unanimously. 

High Court

23. The borrowers obtained special leave to appeal to the High Court. 

24. As a result of the grant of special leave, the principal questions to be determined by the High Court in the appeal were whether:

a. clause 24 of each of the mortgages was void and unenforceable as contrary to the public policy underpinning the Act; and

b. section 24 of the Act operated automatically to extinguish the mortgagees’ title at the expiry of the time period.

High Court’s decision

25. The High Court unanimously dismissed the appeal from the Queensland Court of Appeal. Kiefel CJ and Edelman J delivered joint reasons. Gageler and Gordon JJ (in a joint judgment) substantially agreed with Kiefel CJ and Edelman J, as did Steward J separately. 

26. Kiefel CJ and Edelman J noted (at paragraphs 9 to 11 of their reasons – emphasis added): 

In WorkCover Queensland v Amaca Pty Ltd [2010] HCA 34; (2010) 241 CLR 420 at 433 per French CJ, Gummow, Crennan, Kiefel and Bell JJ, … explained the effect of statutes of limitation by reference to what had been said by Gummow and Kirby JJ in The Commonwealth v Mewett (1997) 191 CLR 471 at 534-535; see also The Commonwealth v Verwayen (1990) 170 CLR 394 at 404 per Mason CJ. In Mewett, their Honours said that in the case of a statute of limitations in the traditional form a statutory bar does not go to the jurisdiction of the court to entertain the claim but rather to the remedy available, and therefore to the defences which may be pleaded. The cause of action is not extinguished by the statute and unless a defence relying on the statute is pleaded, the statutory bar does not arise for the consideration of the court.

What was said in Mewett accords with the reasons of Mason CJ in The Commonwealth v Verwayen (190) 170 CLR 394 at 405. Speaking there of then s 5(6) of the Limitation of Actions Act 1958 (Vic) (which provided "No action for damages for negligence ..., where the damages claimed by the plaintiff consist of or include damages in respect of personal injuries to any person, shall be brought after the expiration of three years after the cause of action accrued”) his Honour said that although the terms of that provision are capable of being read as going to the jurisdiction of the court, limitation provisions of this kind have not been held to have that effect. Instead they have been held to bar the remedy but not the right and thereby create a defence to the action which must be pleaded (Citing Dawkins v Lord Penrhyn (1878) 4 App Cas 51 at 58-59; The Llandovery Castle [1920] P 119 at 124; Dismore v Milton [1938] 3 All ER 762; Ronex Properties Ltd v John Laing Construction Ltd [1983] QB 398; Ketteman v Hansel Properties Ltd [1987] AC 189 at 219. These statements have been applied with approval on a number of occasions in this Court (Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297 at 305; Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; (2006) 225 CLR 364 at 372 [20], 373-374 [24]-[25]; Brisbane City Council v Amos (2019) 266 CLR 593 at 615-616 [49]; Minister for Home Affairs v DMA18 (2020) 95 ALJR 14 at 18 [4], 23 [30]; 385 ALR 16 at 19, 26. Mason CJ went on to observe that since the right to plead a limitations defence is conferred by statute a contention that the right is susceptible of waiver "hinges on the scope and policy" of the Act. The same may be said of the question whether a person may abandon the statutory right to plead a defence of limitation, by agreement.

27. The borrowers relied upon the public interest in the finality of litigation as being the public policy behind the Statute of Limitations. 

28. Kiefel CJ and Edelman J rejected that argument, holding:

Mason CJ concluded (The Commonwealth v Verwayen (1990) 170 CLR 394 at 405-406) that by giving defendants a right to plead the expiry of the relevant time period as a defence, rather than imposing a jurisdictional restriction, the purpose of the Victorian Limitation Act could be discerned as one to confer a benefit on individuals "rather than to meet some public need which must be satisfied to the exclusion of the right of access of individuals to the courts". It was therefore possible, in his Honour's view, to "contract out" of statutory provisions of that kind.

29. At paragraph 35 of the joint judgement, Kiefel CJ and Edelman J held:

A defendant may bargain away the statutory right and that bargain may be enforced.

30. Justices Edelman and Gordon agreed with the judgment of Kiefel CJ and Edelman J and noted that the principal question in the appeal was whether clause 24 of the mortgages in question was void and unenforceable as contrary to the public policy underpinning the [Qld Limitation Act]. 

31. Their opinion (at paragraphs 38 - 40) was:

… That question raises a preliminary point of contractual construction and a subsidiary question about the appropriate relief if a party breaches a covenant not to rely upon a limitation defence.

32. Steward J noted at paragraph 66 of his judgment (in respect of construing the meaning of the terms of a contract): 

… there was no onus on the respondents to establish that their construction of cl 24 is correct. The issue of construction is a question of law (Deane v City Bank of Sydney [1904] HCA 44; (1904) 2 CLR 198 at 209 per Griffith CJ, Barton and O'Connor JJ), to be objectively determined having regard to the text and context of the contract, and the commercial purpose or objects which it was intended to secure (Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at 116 [46] [47] per French CJ, Nettle and Gordon JJ). 

33. At paragraphs 76 and 78 of his judgment, in considering whether the parties could contract out of the Statute of Limitations, Steward J noted: 

Two relevant propositions may be extracted from the reasons of Mason CJ in Verwayen.  [First] Whether or not a person can waive the defences conferred by a particular Statute of Limitations depends on the scope and policy of that Act; the test is whether the applicable provisions are "dictated by public policy" and were enacted "not for the benefit of any individuals or body of individuals, but for considerations of State” [at CLR 405]. If so, they cannot be excluded by contract. But if the benefit conferred by statute is otherwise private in nature, the law may permit the parties to exclude it.

…

78. The second proposition is that Parliaments have chosen to implement the public policy of finality in litigation by conferring on defendants a right to plead an applicable Statute of Limitations defence, rather than by imposing a restriction on jurisdiction (Verwayen at CLR 405). In that respect, no party disputed that it had been long established that the language used in the Limitation Act – an action "shall not be brought" – was a reference to a defendant having the capacity to plead a defence of limitation and not to the extinguishment of any underlying rights of a plaintiff (Brisbane City Council v Amos (2019) 266 CLR 593 at 599 [7] per Kiefel CJ and Edelman J). On that basis, Mason CJ in Verwayen concluded, for the purpose of considering whether the defences conferred by a Statute of Limitations (The Court in Verwayen was concerned with the Limitations of Actions Act 1958 (Vic)) may be waived, as follows (Verwayen at CLR 405-6] – emphasis added)):

"I conclude that the purpose of the statute is to confer a benefit upon persons as individuals rather than to meet some public need which must be satisfied to the exclusion of the right of access of individuals to the courts. On that basis, it is possible to 'contract out' of the statutory provisions, and it is equally possible to deprive them of effect by other means such as waiver. Put differently, the provisions are procedural rather than substantive in nature, which suggests that they are capable of waiver".

34. And at paragraph 88:

Once it is accepted that the policy of finality in litigation is one that is statutorily entrusted to each defendant, it follows that the limitation defences may be waived. It also follows, as a matter of logic and principle, that a party may agree to promise not to invoke those defences as part of the contractual bargain. 

35. Ultimately, all 5 members of the High Court who heard the appeal determined that it was permissible for the parties to agree to contract out of the provisions of the Limitation Act and that such an agreement was not contrary to public policy. The High Court also found that s 24 of the Limitation Act did not operate automatically to extinguish the respondents’ title at the expiry of the limitation period.

36. The Court noted that the provisions of the Limitation Act do not act as a statutory bar to bring proceedings or operate automatically to extinguish title, but instead give a party a defence.

37. Ultimately, the Court concluded the Limitation Act conferred rights on individuals rather than fulfilling any public need and therefore the contractual provision under which the borrowers waived their rights under the Limitation Act was effective.

Conclusions 

38. The Limitation of Actions Act 1974 (Qld) is similar to the Limitation of Actions Act, 1958 (Vic) (although the time limits are slightly different – 12 years to sue on a mortgage in Queensland, compared to 15 years in Victoria). 

39. The case shows the importance of borrowers obtaining proper advice about the terms of any loan documentation before borrowing (in particular, relating to terms like waiving any limitation rights). 

40. On the other hand, the decision should give lenders confidence that properly drafted loan documentation will protect their right to recover debts, even if there has been a very lengthy delay in taking action. 

41. It has been noted by other commentators that the decision did not deal with whether this type of contractual provision may be held void if it is ultimately found to be an unfair contract term under the Australian Consumer Law or under state legislation dealing with unfair contract terms.

WG Stark

Hayden Starke Chambers

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

The Supreme Court of Queensland (Holmes CJ) has recently considered the duty of a mortgagee in selling a secured property in uncertain economic times (ie during a pandemic). 

In HSBC Bank Australia Ltd v Wang & Ors [2021] QSC 58, the Court considered an application to remove a caveat lodged by the registered proprietors of a property on Hope Island on the Gold Coast in Queensland. 

The caveator/registered proprietors had bought the property in 2009 for $9 million with loan funds ($4.5 million) obtained from the mortgagee, which were secured by a registered first mortgage. The mortgage went into default, and the lender obtained default judgment for possession of the property, and took possession by warrant on 1 December 2019. 

The lender sold the property for $5,510,000 after advertising it for sale at a time when Queensland's international and state borders were closed, with settlement due 18 December 2020.

The caveator/registered proprietors lodged the caveat after the sale, and just before settlement on 17 December 2020. 

The caveat claimed that the registered mortgagee had sold the property in breach of the mortgagee's duty to act in good faith towards them, because the mortgagee had sold in a pandemic, had sold too rapidly, had not waited until the property market improved and sold at a significant undervalue.  

The mortgagee had obtained a valuation of the property in January 2020 in the range of $5,500,000 to $7,200,000. The valuer noted that the property was bought in 2009 at the peak of the market, and that it had been poorly maintained since then. He recommended an extended sales and promotion period of 6 to 12 months, noting that a shortened time frame and forced sale conditions would significantly reduce the potential sale price. 

In July 2020, a further valuation was obtained, noting the significant deterioration in the market at that time (due to the pandemic), and the resulting reduced market value of the property. 

An auction took place in early August 2020; the reserve price was $6,750,000. The highest bid at the auction was $4,500,000 and it was passed in. 

Eventually, the property was sold a little over a month after the auction for $5,510,000. This price was accepted as it was the best offer received, and it was significantly higher than the highest bid at the auction, despite a significant marketing campaign. The property had not received much interest and had a good deal of negative feedback about its current state. Further, there was uncertainty about the economy in general and the prestige property market in Queensland in particular. 

The registered proprietors obtained expert valuation evidence that challenged the lender's valuation, noting in his opinion that the land was valued at around $6 million when it was sold, and the improvements at the property increased the value to over $10 million. 

The Court then proceeded to analyse a mortgagee's duty of good faith to its borrowers, and noted that Griffiths CJ in the High Court in Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676 described the duty of good faith as meaning that the mortgagee must not: 

    ...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.

Conclusions 

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. 

WG Stark

Hayden Starke Chambers