Recently the Victorian Court of Appeal has in MBF Investments Pty Ltd v Nolan reversed the trial judge’s decision in Nolan v MBF Investments Pty Ltd and Nolan v MBF Investments Pty Ltd [No 3] and considered whether a mortgagor of a house has a “home occupation interest” which a mortgagee should strive to protect when exercising a power of sale. The court also considered the extent of a mortgagee’s statutory duty on sale and the extent to which a mortgagee may contract out of that duty.

Facts

Mr Nolan was the owner of a property. The property comprised a house and adjoining vacant land and was subject to a mortgage to MBF Investments Pty Ltd (MBF). Following Mr Nolan’s default on the mortgage, MBF notified him of its intention to exercise its power of sale by auctioning the property. Mr Nolan pleaded with MBF to allow him to subdivide the land and sell it as three separate lots. Subsequently, MBF and Mr Nolan entered into a deed by which MBF agreed to delay the proposed sale so the property could be subdivided.

The deed provided that the method and timing of the sale of the subdivided property was to be at the absolute discretion of MBF. The land was subsequently subdivided into three lots, one of which comprised Mr Nolan’s house (Lot 1).

Prior to the auction Mr Nolan repeatedly requested MBF to sell vacant Lots 2 and 3 before selling Lot 1. Lot 2 was sold first and sold for much more than was expected, although not enough to discharge the mortgage in full. MBF then put Lot 1 up for sale and Mr Nolan tried again to persuade MBF to offer vacant Lot 3 for sale before Lot 1. MBF sold Lot 1 and evidence was lead that if MBF had sold vacant Lot 3 prior to Lot 1 the proceeds would have been sufficient to repay the mortgage and would have left Mr Nolan freehold possession of his house (Lot 1).

Mr Nolan then instituted proceedings against MBF for improperly exercising its power of sale.

The first decision

The trial judge found that MBF had breached its duty of sale under section 77(1) of the Transfer of Land Act 1958 (Vic)1. That section requires a mortgagee to sell “in good faith and having regard to the interests of the mortgagor”.

Interestingly, the trial judge imposed a duty on the MBF to consider the ”home occupation interest of the mortgagor when exercising its power of sale” and that it should have sought to reserve that “interest” when selling. The “home occupation interest” was characterised as “the use and enjoyment of the dwelling house for home occupation as an incident of his legal interest in the property as the owner of the estate in fee simple”.

It was further held that the deed did not allow MBF to determine the timing of the sale of the properties and did not constitute a surrender of Mr Nolan’s “home occupation interest” as the deed was not sufficiently clear to exclude the operation of the Act.

The Appeal

The Victorian Court of Appeal upheld the appeal and found there was no breach of duty owed to Mr Nolan under the Act. The court acknowledged that Mr Nolan’s interest and right to possession can be affected by the terms of the mortgage contract. Under the terms of the mortgage Mr Nolan had a contractual right to occupy Lot 1 but by operation of the mortgage and the deed MBF was already in possession of the property.

Implications

Therefore, it was not necessary for the court to directly consider the existence or nature of any “home occupation interest”.

Accordingly, the appeal court did not endorse the notion of a “home occupation interest” but set out some limited circumstances where a mortgagee (MBF) may be required to take into account a mortgagor’s preferences. These were identified by the appeal court as follows:

a mortgagee must act in good faith, that is, conscionably and cannot sell for a purpose other than for the purpose which the power of sale is conferred 

a mortgagee must however take steps to obtain the best price that is consistent with its right to enforce interest which in turn requires the mortgagee to consider how the property should be advertised and to allow an appropriate time between the advertisement and sale 

the mortgagee must also have regard to the interests of subsequent security holders. Importantly, if there is no doubt that the sale of the lots preferred by the mortgagor would be sufficient to discharge first and subsequent mortgages, a failure to sell the preferred lots may breach the mortgagee’s duty to sell in good faith.

On the facts there was no evidence of lack of good faith by MBF in selling Lot 1 prior to Lot 3 or that MBF had acted in wilful or reckless disregard to Mr Nolan’s interest. Lot 1 was sold as there was uncertainty about whether Lot 3 would sell for an amount sufficient to recover the outstanding debt, or at all. In making this determination it was important that MBF had obtained advice from estate agents regarding the correct order of sale to maximise the sale price of the properties and had adhered to that advice.

Finally, the court noted that a mortgagee cannot contract out of its duty to act “in good faith” as public policy would not allow it. However, this did not mean the mortgagee could not contract out of a lesser duty such as an alleged “home occupation interest”.