Mortgagee power of sale

Written by: Chelsea Lo Giudice

When a mortgage agreement is carried out between the borrower and lender (whether the loan is a commercial or personal), the lender gains a legal right to possess the property in the event the borrower defaults or breaches the terms and conditions of the agreement. This circumstance is known as a ‘mortgagee in possession’.

What is a Mortgagee Sale

A mortgagee sale is the sale of a property conducted by the lender to repay a loan in arrears.

Such a situation cannot occur at a whim. Firstly, there must be a clear default or breach of the terms and conditions set out in the agreement. What constitutes a default will vary with each loan agreement, however, the overarching concept of a default is the event in which multiple repayments are in arrears and the mortgagor has not resolved the issue within the timeframe given. A formal default will be placed, typically within 60 – 90 days of arrears.

Other areas of default can also include breach of financial covenants, if the borrower (being a company) becomes insolvent, if the borrower fails to maintain their insurance or any other  definitions under their loan documents which can occur in a breach of contract.

A mortgagee sale can be carried out nationwide, with each state providing their own legislation in support:

State	Legislation	Section
Victoria	Transfer of Land Act 1958	S77 & s78
New South Wales	Conveyancing Act 1919	S109 – S111
Tasmania	Land Titles Act 1958	S78(1)
Queensland	Property Law Act 1974 Property Law Act 2023	S116 S113
Northern Territory	Law of Property Act 2000	S86, S90
Western Australia	Property Law Act 1969	S57
South Australia	Law of Property Act 1936	S47
Australian Capital Territory	Land Titles Act 1925	S99, s100

Broadly, s420a of the Corporations Act 2001 (Cth) applies to a mortgagee exercising the power of sale of a company-owned property only.

A mortgagee sale is not to be confused with an ordinary sale. An ordinary sale is when a property is voluntarily sold by the proprietor on title.

Mortgagee Obligations:

The mortgagee cannot simply put the property up for sale once a formal default has been issued. The mortgagee has an obligation to exercise the power of sale Bona Fide; meaning they must ensure they are selling the property at the market price, and not at a price they see fit. However, this does not mean that the mortgagee must place the mortgagor’s rights above its own.

Mortgagees must ensure they:

–              Engage licensed, qualified real estate agents.

–              Complete a new valuation of the property

–              Ensure that the property it marketed correctly; and

–              Maintain accurate records

Furthermore, s420A(1) of the Corporations Act 2001 (Cth) also affirms the need for bona fide action, outlining that the property, if and when sold, must be sold for no less than market value or otherwise the best price reasonably attainable (given the existing circumstances surrounding the sale).

Each state, as previously mentioned, has its own legislation to ensure the process of the sale is completed in good faith. Should the mortgagee fail to comply, the borrower may be able to make a claim of unconscionable conduct against the mortgagee.

Should the mortgagor wish to make a claim of unconscionable conduct, the following elements must be satisfied:

• There must be a circumstance in which one party is at a special disadvantage
  • A special disadvantage is a circumstance adversely affecting a party, which could be, and not limited to,  a need of any kind, age, infirmity of body or mind, illiteracy or lack of education, sickness or sex.
• The party considered the ‘strongest’, must have knowledge of the other’s special disadvantage; and
• There must be an unconscientious exploitation of that disadvantage.

The ASIC Act requires that an entity must not engage in conduct that is unreasonable or unfair that the law considers it to be unconscionable. S12CB(1) of the act outlines this as follows:

(1) A person must not, in trade or commerce, in connection with:

 (a) the supply or possible supply of financial services to a person; or

 (b) the acquisition or possible acquisition of financial services from a person;

engage in conduct that is, in all the circumstances, unconscionable. Overall, a mortgagee possession is designed to protect the lender’s security interests from default. The act of the possession can often be viewed as a last resort, however, in some circumstances it can have a severe impact on borrowers and their financial security. It is imperative to have an understanding of the process, the consequences of a loan agreement, as well as the rights and obligations of both the borrower and the lender