Until recently, lenders in New Zealand have faced uncertainty about their acceleration rights when secured by a mortgage of land as well as by a debenture (ie, a charge over all assets). That uncertainty has now virtually dissolved.
The doubt came about through the relationship between Section 92 of the Property Law Act 1952 and Section 9 of the Receiverships Act 1993. Section 92 requires a mortgagee, where the mortgagor is in breach of the loan terms, to give the mortgagor four weeks' notice before:
- exercising his power of sale;
- entering into possession of the land; or
- accelerating the loan.
The notice must specify the breach that the mortgagee is relying on, and must require the breach to be remedied.
Section 9(1) of the Receiverships Act involves applying the Property Law Act to receivers. It provides that Section 92 does not apply to:
- the appointment of a receiver by a mortgagee;
- the entering into possession of property by a receiver; or
- the payment of money secured by a debenture.
The problem has been how to reconcile the conflicting provisions of the two acts, especially where a loan is secured by both a mortgage of land and a debenture. Previous New Zealand cases, particularly Commodore Pty Ltd v Perpetual Trustees (1984), BNZ Finance Ltd v Smith & Leuchars (1981) and DFC v Samuel (1990), have only added to the confusion.
These earlier decisions indicated that if a loan is secured by a mortgage over land (whether or not it is also secured by a debenture) then, upon an event of default, the lender cannot accelerate the loan immediately. Instead the lender has to give the owner of the land at least four weeks to remedy the default, as provided for in Section 92. However, imagine the situation where a syndicated loan secured over group assets is also secured by a collateral mortgage of a small piece of land, and the subsequent reaction of a facility agent when told that despite the wording of the facility agreement, a loan cannot be accelerated until four weeks' notice has been given.
Happily, the position has been clarified by a recent decision of the New Zealand Court of Appeal in Bank of New Zealand v Adsett (CA280/99), where it was held that Section 9 overrides Section 92(1). While the court did not consider the relationship of the Property Law Act and the Receiverships Act in detail, the court did state that it favoured the view that where the "payment of money is secured by a debenture, section 92(1) has no application even if that payment is also secured by a mortgage of land".
This decision has therefore clarified the position and obligations of the lenders in these situations. A collateral mortgage will not prevent the acceleration of a loan, so the lender's position will not be weakened by having collateral security over land (as opposed to having a debenture alone).
For further information on this topic, please contact Michael Dineen at Buddle Findlay by telephone (+64 9 358 2555) or by fax (+64 9 363 0709) or by email ([email protected]).
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