Those that do encounter the less savory aspects often find themselves unprepared for the obligations they face and the power banks hold under a mortgage to satisfy a debt. This article will examine some issues around the power of sale and personal covenants under a mortgage.
Power of Sale and Personal Covenants
A power of sale allows a mortgagee to sell the mortgaged property in satisfaction of the debt owed. This will generally occur in the event of a series of defaults on a loan by a mortgagor, though the mortgagee will reserve the right to exercise its power of sale following only a single breach.
The power of sale is not the end of the story for a mortgagor. In the event that the property is sold and there still remains a balance owing on the loan, a mortgagee can pursue an individual personally through either the personal covenant to repay or a guarantee, usually signed in conjunction with the facility offer.
Duties Owed by a Mortgagee Exercising a Power of Sale
A power of sale does not mean that a mortgagee can sell the property for any price it wants and then pursue a mortgagor for the remainder. In NSW the mortgagee has to take reasonable care to ensure that the land is sold for market value, or if this is not attainable for the best price reasonably available. A mortgagee who fails to meet this duty can be sued for any loss incurred by the mortgagor.
The duty owed is limited though. The mortgagee holds all power in making decisions associated with selling the property, including whether it should be by auction or private sale, the order in which properties will be sold, and the way in which properties should be marketed.
A recent Victorian case of MBF Investments Pty Ltd v Nolan has taken a different approach to the duty owed by the mortgagee when exercising a power of sale. In that case a mortgagor in default convinced the mortgagee to allow him to subdivide the mortgaged property into three lots, with two remaining vacant and one with the family home. The mortgagor requested that the two vacant lots be sold first in an effort to satisfy the mortgage without losing his home. The bank had received advice that stated the family home should be auctioned second. An extraordinarily high offer was accepted by the mortgagee for the first vacant lot, meaning that if the other vacant lot were sold the debt would be satisfied and the mortgagor could keep his home. Despite this, the mortgagee proceeded to sell off the family home second, along with the third lot, providing the surplus funds to the mortgagor.’
At trial, the judge found that the sale of the family home lot before the sale of the second vacant lot was ‘manifestly unreasonable’ and held the mortgagee to be guilty of wilful default. This was overturned on appeal, though the court held that in exercising a power of sale ‘a mortgagee must act in good faith, that is conscionably, and cannot sell for a purpose other than that which the power of sale is conferred.’ Whether or not this additional element of acting ‘conscionably’ is introduced into NSW mortgage law remains to be seen (as does its application in Victoria).
Fraud and All Money Mortgages
Like all property interests in NSW, once a mortgage is registered the mortgagee receives an indefeasible title. This means that the title cannot be defeated except in certain specific circumstances. An example of the power of indefeasibility is the case of fraud. Where a mortgage is procured fraudulently, without the knowledge of the registered proprietor of the property, the mortgagee is still entitled (in some circumstances) to enforce their interest and sue for the loan amount.
Whether or not this is the case depends on if the mortgage is a ‘traditional mortgage’ or an ‘all money’s mortgage’. A traditional mortgage states exactly what interest the land secures and an acknowledgement that the relevant money was received. An all money’s mortgage though only secures future and past indebtedness. Where a loan agreement is fraudulently executed, it will be void at law. When this happens the all money’s mortgage is effectively unenforceable because it secures a loan that is void at law. In the case of the traditional mortgage, the fact the loan agreement is void at law will not prevent the mortgage being enforced for the amount stated in the mortgage document.
If you are seeking to grow your business through mortgage finance, or are facing action from a power of sale, your options can be improved with the right advice. Contact Kells for expert advice on all mortgage related issues.