The recent Supreme Court of New South Wales case of Commonwealth Bank of Australia v Thompson illustrates the dangers of a mortgagee in possession delaying the sale of mortgaged property. In this case the delay led to the mortgagee abandoning its claim against the guarantor for interest accrued during the period of its inactivity.
The bank took possession of the property by appointing a receiver under its mortgage, and put the property on the market for sale. However, after that the bank did not take any active steps to market or maintain the property for over 18 months. When the bank initiated proceedings against the guarantor to recover over A$3 million, inclusive of interest accrued to the date of the hearing, the guarantor argued that the bank's inaction after entering into possession caused prejudice to the guarantor because the guarantor could not cause the mortgagor to sell or maintain the property, and therefore was unconscionable.
The bank, possibly after seeing the Court leaning towards granting relief to the guarantor, made a concession on the last day of hearing, reducing its claim to A$1.9 million with interest to accrue only from the date of judgment, effectively dropping its claim for interest over the 18 month period of inaction. The Court held that the prejudice suffered by the guarantor had been ameliorated by the bank's concession and, therefore, the conduct of the bank was not unconscionable. Judgment was given for A$1.9 million plus interest from the date of judgment.
This case serves as a warning that if a mortgagee in possession takes initial steps to sell a property, but then fails to take active steps to market or maintain it, it may find itself unable to recover interest from a guarantor during the period of its inactivity. However, it would be unusual in New Zealand, as a matter of practice, for mortgagees to enter into possession (given the obligations that entering into possession trigger) and there is well established case law in New Zealand to the effect that the mortgagee has the right to decide when it is appropriate to sell the property, and to make that decision in its own interest (see Mitchell v Trustees Executors Ltd  NZCA 519).