Bankers have always assumed that they have all the time in the world to sell a property under a power of sale, without liability for loss because of delay.

This assumption is no longer correct following a decision of the Supreme Court of New South Wales - Commonwealth Bank of Australia v Thompson [2013] NSWSC 149.

In Thompson, the force of the expert evidence served by the defendant (the guarantor) led to the Bank abandoning its claim for interest, which amounted to over $1 M, to atone for its delay in selling a commercial property security.

The property development project

The sleepy country town of Biloela is an unlikely place for a $3.2 M townhouse development.

But in the halcyon days of 2005, BankWest [BankWest was acquired by the Commonwealth Bank of Australia in October 2008] offered a commercial advance facility of $1.84 M to fund a property development project to build 10 four bedroom townhouses. The feasibility was based on a strong demand for rental housing in Biloela, which is a rural service centre with a population of approximately 6,000, in central eastern Queensland.

In early 2009, 7 townhouses were completed. The properties were marketed for sale. 1 property was sold. 6 townhouses remained unsold, and were rented.

In August 2009, the loan facility both reached its limit and expired. The development company had run out of funds to complete the 3 townhouses which were in a lock-up state. The loan facility could not be refinanced. Various attempts made to sell the properties had failed.

The Proceedings

On 11 April 2011, the Bank took possession of the property securities, by appointing a receiver under the mortgage. The Bank collected the rents, but the rents were insufficient to cover the interest on the loan facility

In May 2011, the Bank put the properties on the market for sale by private treaty, but did not attract any offers.

In September 2011, the Bank instituted proceedings against the guarantor.

The Bank’s claim under the guarantee was $3.068 M, inclusive of interest, as at the hearing.

The guarantor did not dispute the Bank’s power to enter into possession and the power of sale.

Instead, the guarantor argued that the proceedings were premature as the property securities had not been sold, and that even if found liable, the proceedings should be stayed until the property securities were sold, for these reasons:

The Bank’s delay in selling the properties, since it took possession in April 2011, had caused prejudice to the guarantor.
In particular, since April 2011, the guarantor had been unable to cause the debtor company to take steps to sell or improve the properties for sale, which had interfered with the debtor company’s ability to pay the debt outstanding to the Bank. [Thompson at paragraph 48]

Did the Bank owe a duty to the guarantor?

The provisions of the guarantee were – The Bank is not liable for any loss caused by the ... delay in exercising a right or remedy, whether or not caused by its negligence.

In two decisions in 1991 [Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700 (Cole, J) and also Mailman v Challenge Bank Ltd [1991] NSWCA 182 (per Sheller JA, with Gleeson CJ and Handley JA agreeing)], the Supreme Court of NSW had reviewed similar provisions and had rejected arguments that the Bank owed a duty - to sell a property security upon the request of a guarantor. Note: in these cases, the guarantor had made the request because the market was falling.

In Thomson, Associate Justice Harrison had a different situation to consider, namely, that: the Bank ... took preliminary steps to put the property on the market and then did nothing for over 18 months. [Thompson at paragraph 73]

Her Honour drew upon the English Court of Appeal decision of Palk v Mortgage Services Funding plc [[1993] Ch 330 at 336-338 per Sir Donald Nicholls V-C, with Butler-Sloss LJ and Sir Michael Kerr agreeing], in which the Court stated –

A duty to be fair

... a mortgagee can sit back and do nothing. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor. [Thompson at paragraph 71]

This is the first time that Palk has been considered in Australia to answer this question –

Does the Bank, by doing nothing breach a duty to be fair to a mortgagor, and its guarantor?

The expert evidence

The guarantor relied upon two experts to prove that the Bank had not taken active steps to sell or improve the properties for sale, which it could have taken.

The two experts were a property marketing consultant and a registered valuer. Their evidence was that since the Bank had taken over the management and sale of the properties, their advertising for sale had been inadequate, the agent had demonstrated a lack of interest in renting the houses and the site had been poorly maintained. [Thompson at paragraph 50]

In terms of lack of marketing, internet searches revealed no listings, the listing agent had no card in their window, there was a sign on only one property (not a sign on each) and no advertisement that the properties were open for inspection. In terms of lack of maintenance, no one had taken responsibility: the properties were untidy, the grass was long, snakes had been reported, and the swimming pool was closed and green. In terms of lack of management, if a property fell vacant, it had not been re-let.

The valuer valued the properties at $2.830 M if completed, and $2.515 M if not.

The Bank did not serve any expert evidence in reply.

The Bank sees the writing on the wall

In early December 2012, after the expert reports were served and ‘after about 18 months of almost complete inactivity [Thompson at paragraph 67], the Bank appointed new exclusive real estate agents for the sale of the properties by expressions of interest. The Bank agreed to fund a marketing campaign.

This met the guarantor’s argument about inactivity as from December 2012, but not the inactivity before that date.

On the last day of the hearing, the Bank saw the writing on the wall that the Court was leaning towards granting relief to the guarantor, and during closing submissions:

... the Bank made a concession that it is only seeking the recovery of the amount of $1.9 M together with costs of enforcement on an indemnity basis with interest to run from the date of judgement. Hence, the ... defendant is no longer obliged to pay the interest on $1.9 M that accrued over the period that the Bank was dilatory. [Thompson at paragraph 74]

Judgment was entered in the sum of $1.9 M with interest to run from the date of judgment.

Conclusions

If a mortgagee in possession takes steps to sell a property, it must take active steps for sale, or it may find itself unable to recover interest during a period of inactivity.
The active steps will ordinarily involve an outlay for marketing, for maintenance, and if needs be, for improvements.
The provisions in the standard security documents excusing the Bank from liability for delay in the sale of a property security may need to be revised in the light of this decision.

This article was first published by Cordato Partners in Lexology which is an international innovative, web-based service that provides over 200,000 company law departments and law firms around the world with a depth of free practical know-how on specialist areas of law © Copyright 2013 Sydney