Mortgagee sales – new standards

Legislation has now commenced that aims to provide greater protection to borrowers who fail to meet their loan repayments and subsequently have their property sold by a mortgagee. The amendments have been slated as providing landowners with protection from “unscrupulous mortgagees”.[1]

The obligations of mortgagees in relation to the price to be obtained on a mortgagee sale are now set out in section 111A of the Conveyancing Act 1919 (NSW). These commenced on 1 November 2011 and provide that:

(a) if the land has an ascertainable market value when it is sold, it must be sold at not less than its market value; or

(b) in any other case, it must be sold at the best price that may reasonably be obtained in the circumstances.

Mortgagees are already required to comply with this obligation when selling the property of a corporation as provided for by section 420A(1) of the Corporations Act 2001 (Cth).

Prior to the introduction of this legislation, mortgagees were required to comply with a general duty of good faith when selling property owned by individuals. This duty prevented a mortgagee from wilfully or recklessly sacrificing the interests of the borrower but did not require the mortgagee to sell for any specified price.

As a result of the introduction of section 111A it is now critical for a mortgagee to retain a thorough paper trail evidencing that appropriate steps have been taken to comply with its obligations. The mortgagee should ensure, where possible, that the sale of a property is supported by valuation and that an industry accepted marketing process has taken place.

The vast majority of mortgagees would have been complying with these practices prior to the introduction of this legislation. Nevertheless it presents an ideal opportunity for lenders to review their practices and revise where necessary.

On the other side of the coin, individual borrowers can now take greater comfort that legislative weight has been added to their existing common law protection from mortgagees improperly disposing of mortgaged property.

The mortgage team at Kells the Lawyers provides services and support to many lenders and mortgage brokers.  If you require assistance or more information, please contact Lorri Field or Amy Harper on (02) 4221 9311 or by email lfield@kells.com.au or aharper@kells.com.au.

[1] Sharpe, P, Real Property and Conveyancing Legislation Amendment Bill 2009, Second Reading Speech.