In a decision surprising to banks and other lenders, the High Court has ruled that a lender cannot issue a notice to accelerate a loan before the expiry of a Property Law Act (PLA) notice, where a PLA notice is required.
We disagree with the reasoning but we understand the case is not being appealed.
Banks and other lenders will need to think carefully about how they accelerate secured loans.
Should banks change their processes?
The ruling in ANZ v Boyce is not binding on future High Court cases, so the position will remain somewhat uncertain until the issue reaches the higher courts (we understand this particular decision is not being appealed).
In the meantime, banks and other lenders should consider:
- including acceleration as a potential outcome listed in the PLA notice, whether or not there is an automatic acceleration clause
- issuing acceleration notices in documents that are separate to PLA notices, and
- issuing those acceleration notices following the expiry of PLA notices.
Two banks had their claims against borrowers questioned by the High Court. A single decision covered three claims, each seeking recovery of the debt remaining after a mortgagee sale. Although no borrower advanced any defence, the court was concerned that neither bank had issued a separate written notice to accelerate the loan in question.
A lender accelerates (calls up) a loan by requiring all future payments to be paid immediately, because of a default. Where the loan is secured by a mortgage, a PLA notice is required before any acceleration is effective, except where the lender holds a general security interest.
Importantly, the banks’ rights to the mortgagee sale proceeds were not in question. The debate was only about whether the banks could sue the borrowers for the deficit. In particular, could the banks sue for the accelerated instalments?
The banks argued that the PLA notice itself in each case adequately gave notice to the borrowers of the acceleration. Associate Judge Bell disagreed, on the basis that the banks could not exercise a power to accelerate until after the PLA notice had expired. His Honour said that the Act prevents a lender issuing an acceleration notice until after the expiry of a PLA notice, just as it prevents a lender from selling mortgaged land until after the expiry of a PLA notice.
One of the banks was able to point to an automatic acceleration clause in its lending documents. For that bank, the judge accepted that no acceleration notice was required in addition to the PLA notice. That bank was free therefore to sue its borrowers for the deficit.
The other bank had no such clause in its documents. Its contract required a notice from the bank before the loan could be accelerated. There was no notice, because the PLA notice was not capable of also being a notice accelerating the loan. The bank therefore could not sue for its deficit.
Even where the lender can rely on an automatic acceleration clause, as the Judge pointed out, it is important that the PLA notice states that acceleration is a potential outcome of the debtor’s failure to remedy the default.
Chapman Tripp comments
We disagree with the judge and say that he misread the relevant section of the Property Law Act. The section states that: 1
No amounts secured by a mortgage over land are payable by any person under an acceleration clause, and no mortgagee or receiver may exercise a power specified in subsection (2), by reason of a default, unless [a PLA notice has been served and has expired without the default being remedied].
The powers referred to in subsection (2) are the powers to enter into possession of, manage or sell the land.
The judge said that the section defers the mortgagee’s “power” to call up a loan. He rejected the banks’ argument that the section defers only the date on which the accelerated loan becomes “payable”. His Honour’s findings are at odds with the words of the statute.
The section defers certain “powers” such as the power to sell, but it does not defer the lender’s power to issue an acceleration notice. Instead, it expressly states only that no debt is “payable” under an acceleration clause until after the expiry of a PLA notice.
The judge justified his interpretation in part on the basis that, during the PLA notice period, payments and assurances may be provided which “may bear on the mortgagee’s decision whether to call up”. For that reason, lenders should not be allowed to decide to call up a loan until after the expiry of a PLA notice. That is, the bank should not pre-determine the issue. But His Honour was quite comfortable with a bank predetermining its response to a default many months or years earlier, by including an automatic acceleration clause in the loan contract.
This rationale is unconvincing in our view.
It should be possible to issue an acceleration notice before or at the same time as a PLA notice. But the acceleration notice cannot make the amounts payable until the PLA notice has expired. It is also important to state in the PLA notice that, if the default is not remedied, the total debt may or will become payable.
We agree with the decision to the extent that it would be best practice for banks and other lenders to give any acceleration notice by a document that is separate from the PLA notice. It may not be possible, and it obviously creates risk, to combine the two notices into one document.