The facts of this case raise one key issue for determination, to wit, whether the sale of Anthony’s property to S & K Pty Ltd was done procedurally and if not, what recourse is available to Anthony in his attempt to have the sale set aside.
This paper will analyse the key legal principles and procedures pertaining to the exercise of the statutory power of sale by a mortgagee and the extent of compliance by the mortgagee in this case, before proceeding to advise Anthony on his rights.
Generally, a mortgagor’s default of a mortgage entitles a mortgagee to a number of remedies including sale of the mortgaged property and application of the proceeds thereof towards satisfaction of the secured loan amount. However, the statutory power of sale can only be exercised in accordance with statute, the terms of the mortgage instrument as well as principles that have been established in relevant jurisprudence.
The statutory power of sale only becomes available to a mortgagee when the default complained of has not been remedied by the mortgagor even after being given the opportunity to do so. Therefore, before invoking statutory power as a remedy, the mortgagee must be able to show that the mortgagor has not only defaulted in their obligations but also failed to remedy the default within a specified period of time.
In this regard, Sections 106 of the Transfer of Land Act 1893 (WA) (“TLA”), contains a very instructive provision on default procedure. It demands that whenever a mortgagor defaults in its obligations and the default continues for a period of one month or such other period stated in the mortgage instrument, the mortgagee must serve the mortgagor with a written notice requiring that the mortgagor rectifies the default. The proviso goes further to specify that for a notice of default to take effect, it must be served upon the mortgagor personally; or by registered post-to the address entered in the Land Register or the address known by the mortgagee; or by leaving the notice in a conspicuous place within the property which is the mortgage subject; or by facsimile transmission.
Upon issuing a notice under Section 106 of the TLA, a mortgagee does not become entitled to proceed to sell the mortgaged property by auction or otherwise until after a period of one month or such other period as may be stated in the mortgage instrument. When that period has lapsed without the mortgagor’s remedy of default, the mortgagor is then entitled to sell the mortgaged property without any further reference and without becoming liable for selling the property.
The issue of sufficiency of default notices by mortgagees has been the subject of litigation in a number of cases in Western Australia and at the Federal level. In the leading case of Barnes v Queensland National Bank Limited, the High Court held that a sale made pursuant to a mortgage can only be effective if it is done in good faith with the mortgagor’s full knowledge or notice. The Court further stated that a mortgagor, in its default notice, must set out clearly the nature of default complained of.
It is also trite law that a mortgagor must be allowed to exercise its equitable right to redemption. So sacrosanct is this equitable right that the mortgagee must not clog or extinguish it. The operation of the equitable right of redemption is to grant a mortgagor the opportunity to redeem their property by way of payment of the loan amounts owed to the mortgagee. Therefore, before a property of a defaulting mortgagor can be offered out for sale to third parties, it is incumbent upon the mortgagee to give the mortgagor the chance to redeem their property by paying the amounts due and payable under the payable or to rectify their default. This position was affirmed in Fairclough v Swan Brewery Co Ltd in which a deed purporting to preclude redemption was declared as illegal.
Turning to the facts of this case, it is clear there was a notice issued by Kevin allegedly “under s.106 of the Transfer of Land Act 1893 (WA)”. This notice is however problematic for a number of reasons. First, the notice was not issued by the mortgagee as contemplated under Section 106. Even if the same was from the mortgagee, it should not have been acted upon until and unless a period of one month lapsed, as is required by Section 108 of the TLA. That would have enabled Anthony a period to correct the default complained of. For that reason, the sale is totally invalid since the period within which the sale was done was less than one month. Be that as it may, proceeding to auction the property without giving Anthony sufficient notice and opportunity to repay the loan amounted to a blatant clog on Anthony’s equitable right to redeem the property, rendering his right to redeem the property nugatory.
Although there is no express statutory requirement requiring a mortgagee to advertise a mortgaged property before proceeding to sell it by way of auction, it is well settled that in practice, a mortgagee must sufficiently advertise the property to the public if the mode of disposal is public auction. That is well founded on the mortgagor’s duty to act in good faith and to obtain the best possible price for the mortgaged property.
Australian Courts have propounded a number of bare minimums that must be met by a mortgagee for a public auction advertisement to be deemed to be adequate and in good faith. To start with, the advertisement must be made in the appropriate forum to attract the right potential buyers with a view to guaranteeing the best possible price for the property. This was established in the case of Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co. Pty. Ltd wherein the mortgagee had sold a property at an auction upon an advertisement in one paper only, which was not a paper having local readership. The mortgagor lodged a challenge against the sale by auction alleging that the sale price was unfair, which claim the High Court allowed and set aside the sale.
In addition, the mortgagee is duty bound to ensure that an advertisement accurately and sufficiently describes the property at sale. In the case of Pendlebury v Colonial Mutual Life, the Court found that a vague description of the subject property was inadequate to attract possible purchasers of the property and as a reckless conduct on the part of the mortgagee. In addition, the Court was emphatic on the need for mortgagees to be effective and consistent in their marketing of mortgaged property by doing, among other things, advertising in the right forums and even then, more than once.
In the instant case, there is no gainsaying the fact that the advertisement was neither sufficient nor effective as it was done only once and through Australian Financial Times, which is not a local newspaper just as was the case in Australia and New Zealand Banking Group Ltd (supra). Moreover, the advertisement was done during a holiday, Good Friday, which is not a usual day. In addition, the advertisement failed to properly describe the property and its use, thereby violating the principles established in Pendlebury v Colonial Mutual Life (supra). For these reasons, the manner in which the advertisement was done fell below the standard of duty care bestowed upon the mortgagee. By giving a vague description of the property and its use, the advertisement denied prospective buyers the ability to appreciate the nature and value of the property. Similarly, advertising the sale only once, in a non-local paper and on Good Friday effectively reduced any chances of reaching out to many prospective buyers of the property. The result of the poor advertisement was to have the auction attended by a total of three persons only.
It is widely accepted that mortgagees should retain agents to sell mortgaged property by auction. As held in McKean v Maloney, the engagement of an estate agent should be aimed at securing the best possible price for the property. Courts have time and again stated that agents engaged to sell a mortgaged property must be competent enough to secure the best price. In Investec Bank (Australia) Limited v Glodale Pty Ltd & Ors, for instance, the Court’s view was that by hiring an agent who was inexperienced in the relevant local property market, the mortgagee in that case failed to fulfil its obligations under the mortgage. Consequently, the Court awarded the mortgagor 2.7 Million Australia dollars in damages as compensation for the loss occasioned as a result of the acts of the mortgagee’s incompetent agent.
Engaging an agent does not have the effect of waiving a mortgagee’s obligations such as acting in good faith and securing the best price. It was so stated in Commercial & General Acceptance Ltd v Nixon where the Court addressed itself on whether appointment of agents could act as a waiver of responsibility, thus:
“The duty is not discharged by the mortgagee’s appointment of a competent agent, but extends to responsibility for doing what ought reasonably to be done to obtain a proper price or the true market value.”
From the fact pattern, Kevin appointed his friend, Sean, to act as the agent for the sale of Anthony’s property. Although Sean is a real estate agent, the facts disclose that he is a specialist in selling industrial sites and small businesses. Anthony’s property, being a vineyard falls outside Sean’s areas of experience and competence. As such, it would emerge that Kevin hired an incompetent agent to act for the mortgagee in the transaction. This incompetence became clear in Sean’s acts and lack of business which led to the impugned sale. Therefore, the mortgagee in this case failed to retain the services of a competent agent hence a breach of the duty to act in good faith. The fact that the sale was conducted by Sean is of no legal consequence as Sean was an agent of the mortgagee.
To determine the correct reserve value of the mortgage property, it is imperative for a mortgagee to conduct a professional valuation of the property. This position has been well affirmed in a number of decisions including the case of Latec Investments Pty Ltd v Hotel Terrigal Pty Ltd in which the issue of accurate valuation was discussed. The facts leading to the case were that after the defendant failed to service its loan, the plaintiff moved to sell the secured property by auction. In the sale, the mortgagee relied on a previous valuation report. Aggrieved by the auction sale, the plaintiff moved to set aside the sale arguing that the property was undervalued. While agreeing with the plaintiff’s contentions, the High Court held that the sale was tainted with illegality and fraud.
In this case, there was no professional value conducted before Sean could proceed to sell the property. From the fact pattern the value of the sale to property S & K Pty Ltd was way below the market price. Accordingly, the sale would fail on account that it was undervalued and that there was illegality or fraud in determining the reserve value.
Generally, when a property is sold by way of an auction, any member of public may place a bid to purchase the property. However, the long-standing rule in equity and most jurisdictions is that a mortgagee should not sell the mortgaged property to itself and or its agents or associates. This was the conclusion of the Court in the landmark case of Farrar v Farrars Ltd wherein the following principles were stated:
It is perfectly well settled that a mortgagee with a power of sale cannot as against the mortgagor sell to himself……nor to anyone employed by him to conduct the sale… A sale by a person to himself is no sale at all, and a power of sale does not authorise the donee of the power to take the property subject to it at a price fixed by himself.”
The above position has been affirmed in other leading cases in a number cases with very few exceptions. In Sewell v The Agricultural Bank of Western Australia, for example, the Court approved a sale by a mortgagee. The Court considered the fact that the mortgagee had been advertising the property for a period of 18 months without success and it had endeavored to find the best price for the property. The Court also took into account the fact that the purchaser was an independent contractor of the mortgagee hence not directly controlled by the mortgagee.
In addition, mortgagees have the responsibility to make sure that the process of selling a mortgaged process is competitive and independent bids are made. It arose in Jovanovic and Fortson Pty Ltd v Commonwealth Bank of Australia that the subject property had been sold through a private tender in which only one bid had been submitted. In the Court’s view, the sale could not succeed as it was not competitive and the mortgagor had breached the property in such a manner.
Based on the rules stated above, the sale to S & K Pty Ltd which is owned by Sean and his wife is illegal and a violation of the prohibition against a mortgagee’s sale to itself. Sean cannot be regarded as distinct from the mortgagee as he was an agent of the mortgagee for purposes of the sale. This fact compounds the possibility of bias and fraud in the impugned sale.
From the foregoing analysis, it has emerged that the sale of Anthony’s property was done in an illegal and un-procedural manner for a number of reasons. To start with, the decision to sell the property by way of auction was not ripe as Anthony was not given sufficient notice as required by Sections 106 of the TLA, which clogged his right to redeem the property.
Secondly, the advertisement by Sean was insufficient for failing to set out clear and accurate details on the property and for being placed in a non-local paper. Thirdly, Sean was not a competent agent for purpose of the sale. Fourthly, the manner in which the auction was conducted was improper as there was no valuation of the property and the purchaser was an agent of the mortgagee, Sean and his wife and there was no competitive tendering process followed.
In the circumstances, Anthony is entitled to challenge the sale in a court of law and to have the same aside for the above outlined improprieties which could easily render the entire sale process null and void.
Burns, Edward and John Cartwright, Maudsley & Burn’s Land Law Cases and Materials (Oxford University Press2009)
Christensen, Sharon, WD Duncan and Tamara Walsh, Professional Liability and Property Transactions (Federation Press2004)
Esmaeili, Hossein and Brendan Grigg, the Boundaries of Australian Property Law (Cambridge University Press2016)
Kodilinye, Gilbert, Commonwealth Caribbean Property Law (Routledge Taylor and Francis2015)
ODonovan, James, Lender Liability (Sweet & Maxwell2005) 581
Squelch, Joan, “Mortgagees’ Power of Sale and the Duty to Sell at Market Value” (2009) 11 the Finance Industry
Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co. Pty. Ltd HCA 21; 139 CLR 195
Barnes v Queensland National Bank Ltd and Nott HCA 26
Commercial and General Acceptance Ltd v Nixon HCA 70
Farrar v Farrars Ltd (1888) 40 Ch D 495
Investec Bank (Australia) Limited v Glodale Pty Ltd & Ors VSCA 97
Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570
King Investment Solutions v Hussain NSWSC 1076
McKean v Maloney 1 Qd R 628
Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676
Sewell v Agricultural Bank of Western Australia HCA
Property Law Act 1969 (WA)
Transfer of Land Act 1893
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