Commonwealth Bank of Australia Ltd (CBA) sued Mr Rickard, the guarantor of a loan agreement that was entered into between CBA and RHT Developments Pty Ltd (RHT). Mr Rickard was a director of RHT. The matter proceeded against Mr Rickard as the Second Defendant only. The First Defendant, another director, could not be found and served by CBA.
CBA had taken possession of the mortgaged properties that were being developed by RHT after it had breached its loan agreement with CBA. CBA also sought payment from Mr Rickard pursuant to the guarantee. Mr Rickard refused to pay the bank because it had held on to the properties without taking any further steps to market the properties for sale or allow Mr Rickard as director of RHT to cause the properties to be sold.
On 4 July 2005, RHT entered into a loan agreement with the Plaintiff, CBA. RHT, a property development company, sought a loan from the bank to fund the building of 9 dwellings and shared community facilities as part of a ‘community living project’ at Biloela in Queensland. At that time Biloela was experiencing a greater demand for residential dwellings.
The loan consisted of loan facilities and a commercial advance facility of $1,840,000. CBA held a mortgage over the dwellings and also required further security in the form of a guarantee.
Mr Rickard, who was a director of RHT, executed a document styled ‘Small Business and Consumer Guarantee’ (the guarantee) also on 4 July 2005. This guarantee read as one would expect, rendering Mr Rickard personally liable instead of or as well as the customer (RHT), to pay the amounts owed by RHT to CBA. Mr Rickard also indemnified the bank against any loss the bank may have suffered in association with the agreement by signing the guarantee.
Between July 2005 and August 2009, the loan and its related facilities were varied numerous times. For each variation the bank required an updated loan agreement with RHT and required that varied loan to be guaranteed by Mr Rickard.
The last varied loan agreed between CBA and RHT was executed on 10 July 2009. It was a term of the 10 July 2009 loan agreement that RHT was to provide CBA with monthly sales reports and progress claims regarding the 9 dwellings. In breach of the agreement, RHT did not provide CBA with the required reports and progress claims.
The state of the properties at the Hearing
At the time the matter was before the Court, the properties were in the possession of CBA due to RHT’s default. After the bank took possession of the properties in April 2011, preliminary steps were taken to market the properties; however, following these initial steps the bank did very little to market the properties for sale.
There were 9 dwellings on the Biloela site, and at the time of hearing, 6 were completed of which 4 were rented and 2 were vacant. The remaining 3 were only partially completed and were not habitable. The bank collected the rent payable from the rented properties, however, the rent was not enough to cover the interest accruing on the loan.
The Biloela properties were ultimately placed on the market in December 2012, a few months before the matter was scheduled for hearing.
The Plaintiff’s Argument
CBA claimed that it was entitled to sell the properties at any time, despite the effects this may have on Mr Rickard. Further, the bank submitted that it was entitled to call upon all remedies available to it to recover the amount outstanding under the loan agreement.
The Second Defendant’s argument
Mr Rickard refused to pay CBA any amounts owing under the guarantee. Mr Rickard complained that CBA should not be entitled to enforce the guarantee in circumstances where it was mortgagee in possession and had done very little to market the properties for sale/rent, given that, if Mr Rickard was in possession, he could cause RHT to market and/or fix the semi completed properties. Mr Rickard argued that CBA’s failure to do anything with the properties in the 18 months that it held them disentitled it from collecting monies from Mr Rickard under the guarantee. Mr Rickard further argued that CBA’s conduct was contrary to its duty to be fair and amounted to unconscionable conduct.
Mr Rickard engaged 2 experts who gave evidence that until December 2012 the bank had done very little to adequately maintain the properties (for which the bank was collecting rent) and did next to nothing to adequately market the properties for sale and rent.
The court accepted the experts’ evidence in relation to CBA’s management of the properties since taking possession and called the bank’s conduct in relation to marketing the properties for sale ‘dilatory’ and ’tardy’.
During the relevant period, interest was accruing on RHT’s debt at the amount of $1,468.31 a day.
Mr Rickard sought that the proceedings be stayed until the properties were sold or, in the alternative, that the bank’s claim be dismissed.
In order to establish that the CBA’s dilatory conduct was unfair and caused prejudice to Mr Rickard, he relied on the English case of Palk v Mortgage Services Funding plc (Palk).
In Palk, the English Court of Appeal granted the defendant’s application for a judicial sale because the bank chose not to sell the property in its possession. The defendant, Mrs Palk sought to effect sale because she believed that the property market would fall and this would increase the shortfall that she would then personally be liable to pay to Mortgage Services Funding, a financier. Mortgage Services Funding was holding onto Mrs Palk’s house to sell at a later date, and interest was continuing to accrue. The court ordered a judicial sale and emphasised that the bank had a duty to be fair to the mortgagor, and must be mindful of the influence of its conduct on the mortgagor, noting that the mortgagee does not have an ‘unfettered discretion to delay a sale indefinitely’.
The court was critical of CBA’s delay in selling the properties. The court hinted that it may have adopted the reasoning in Palk to determine that CBA had breached its duty to be fair in being dilatory, but on the last day of the hearing, in a largely pre-emptive manoeuvre, the bank waived its claim for interest and sought only the amount owing under the guarantee. Accordingly the court found that CBA had not met the criteria to have acted unconscionably and had not acted in bad faith.
CBA was therefore found to be entitled to enforce the guarantee and Mr Rickard was ordered to pay CBA the sum of $1,900,000. As noted above, he did not have to pay interest, which was a significant sum.
The court’s criticism of the bank’s conduct suggests that banks should not sit on a property and do very little to market it for sale, if in doing so, the guarantor is subject to prejudice and therefore unfairness. This shift is noteworthy given that historically, banks have been able to rely upon longstanding banking principles which allow them to sell whenever they see fit. It seems banks will have to give greater consideration to the mortgagor/guarantor when deciding to wait on realising properties in possession and take active steps to sell or rent the property, or risk having payment under a guarantee reduced.
The court nonetheless affirmed that the bank is able to call upon any of the remedies available to it either by taking possession of the properties or through the enforcement of a guarantee.