Mortgagee Sales

This week Queen City Law dispute specialist Ross Dillon looks at Mortgagee Sales. To read this white paper as a print friendly PDF click here. QCL-MEDIA-SHOOT_4552-litteamTo read more articles by Ross click here. If you have more questions about a mortgage dispute or mortgagee sale don’t hesitate to contact us.

As at November 2013, it may still be some time before the Reserve Bank starts raising the Official Cash Rate, with the flow on effect to mortgage rates, and the likely impact on highly leveraged borrowers. When mortgage rates do increase, mortgagee sales are also likely to increase.

The question that is always asked by the disappointed mortgagor (borrower), who sees his or her trophy property sold at a discount, is whether the sale was at such a low price that the mortgagee has breached some duties to the borrower.

There is a statutory duty of care specified in such circumstances, in section 176 of the Property Law Act 2007. This section provides:

(1)  A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar…or through a court… owes a duty of reasonable care… to obtain the best price reasonably obtainable as at the time of sale [to the following persons]:

(a) the current mortgagor:

(b )any former mortgagor:

(c) any covenantor:

(d) any mortgagee under a subsequent mortgage:

(e) any holder of any other subsequent encumbrance.

(2)  A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court….

It is always a question of fact whether the section has been breached, but there is case law that sets out the required standard very simply.

In ASB Bank Ltd v Lin and Anor [2013] NZHC 2528, Judge Peters summarised the requirements as follows (at paragraphs 44 and 45):

[44] The duty imposed by s 176 is a duty to take reasonable care to obtain the best price reasonably obtainable at the time of sale. In Public Trust v Ottow (2010) 10 NZCPR 879, Asher J set out the steps that usually would indicate that a mortgagee has complied with its duty under s 176. Those steps are:

(a) the appointment of a reputable real estate agent to market the property;

(b) obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property;

(c) marketing over a reasonably long period of time;

(d) an extensive advertising and promotional campaign;

(e) a properly conducted auction; and

(f) a sale price that, given all the circumstances, can be reconciled with expert opinion as to value.everythingmustgol

[45] There is clear authority that a failure to achieve a price equal to market value as assessed by a registered valuer does not of itself evidence a breach of s 176 (Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448)

These standards are not difficult to comply with. Thus, to prove a breach of duty would require a careful consideration of all the steps taken,assessed against the above criteria.

In particular, having a competing valuation to compare to the price achieved at auction will not of itself be enough to establish a breach of duty.

Evidence in relation to each of the stated criteria will be required, showing what was done in relation to each, with the effect of any breach spelled out (probably requiring expert evidence on that breach).

As the criteria are well established, it would be a very rare event for a mortgagee not to “tick”all of what are relatively modest “boxes”. Any case to attempt to hold the mortgagee liable a sale at undervalue will be long, difficult and expensive.

Therefore, at a pragmatic level, the best strategy is for a borrower to engage with the mortgagee to assist in every way possible with a sale process, to ensure that the best possible price is actually achieved.

This usually involves ensuring that the sale process is not a “mortgagee sale” anyway. Those words always depress the likely price. Instead, the borrower is best advised to co-operate with the mortgagee. The mortgagee must be sufficiently confident of the steps being taken that it allows the borrower to conduct and control the sale process.

Having control of the process, the borrower can only have himself to blame if the best possible price in the prevailing market is not achieved. On the other hand, he can also be assured that everything possible was done to get the best price. When things do turn sour, that is always the best practical result.

About the author

• Ross has been a partner and litigator in a leading mid-sized Auckland firm for

almost a quarter century. He specialise’s  in dispute resolution.

To read more about Ross Dillon Click Here

• Ross has a Bachelor of Law (Honours) (1980) and Master of Commercial Law

(First lass Honours) (2000) Auckland

• Email: ross@queencitylaw.co.nz / DDI: 09 970 8813