A recent decision of the Court of Appeal acts as a reminder of the duties imposed on mortgagees in exercising a power of sale, particularly where the mortgagee has acquired the mortgage following default by the mortgagor.

The mortgagor of a proposed subdivision had granted Mr Coltart an option to purchase one lot and entered sale and purchase agreements with a group of purchasers (the Lepionka Purchasers) in relation to other lots.  Following those transactions, the mortgagor defaulted under its mortgage to Westpac.  Shortly after that the Lepoinka Purchasers incorporated a new entity which purchased Westpac's mortgage, adopted the sale contracts with the Lepoinka Purchasers and purported to cancel Mr Coltart's option to purchase. 

The new mortgagee then rejected offers made by Mr Coltart to purchase the property at market value. Subsequently, Mr Coltart registered caveats to protect his interests, including under the option agreement.

The Court of Appeal found that Mr Coltart's caveats were (for the most part) to remain on the basis that:

  • Mr Coltart's option agreement gave him an interest in the mortgagor's equity of redemption and consequently the mortgagee owed him a duty to act in good faith
  • The mortgagee had arguably acted in bad faith in acquiring the mortgage with the intention of exercising the power of sale to protect the Lepionka Purchasers rather than for the primary purpose of recovering its debt
  • The mortgagee could not rely on section 178(2) of the Property Law Act to cancel Mr Coltart's option agreement as that section only applied to contracts that the mortgagee was party to.  Accordingly, the mortgagee had not validly extinguished Mr Coltart's interest under the option agreement.

See Court decision here.