In the recent New South Wales Supreme Court case of Commonwealth Bank of Australia v Thompson, the Commonwealth Bank of Australia Ltd (CBA) sued Mr Rickard, the guarantor of a loan agreement entered into between CBA and RHT Developments Pty Ltd. Rickard was a director of RHT. The matter proceeded against Rickard as the second defendant only as 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 Rickard under the guarantee. Rickard refused to pay the bank because it had held onto the properties without taking further steps to market the properties for sale or to allow Rickard (as director of RHT) to cause the properties to be sold.
On July 4 2005 RHT had entered into a loan agreement with CBA. RHT sought a loan from the bank to fund the building of nine 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 A$1.84 million. CBA held a mortgage over the dwellings and also required further security in the form of a guarantee.
Rickard, in his role as director of RHT, executed a document entitled "Small Business and Consumer Guarantee", also on July 4 2005. This guarantee rendered Rickard personally liable instead of, or as well as, the customer (RHT), to pay the amounts owed by RHT to CBA. Rickard also indemnified the bank against any loss that 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 Rickard.
The last varied loan agreed between CBA and RHT was executed on July 10 2009. Under the terms of this loan agreement, RHT was to provide CBA with monthly sales reports and progress claims regarding the nine dwellings. However, RHT failed to do so.
State of the properties at the hearing
When the matter was brought before the court, the properties were in CBA's possession, 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 little to market them.
There were nine dwellings on the Biloela site; at the time of the hearing, six were complete (of which four were rented and two were vacant). The remaining three were only partially complete and uninhabitable. 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 placed on the market in December 2012, a few months before the matter was scheduled for hearing.
CBA claimed that it was entitled to sell the properties at any time, despite the effects that this could have on Rickard. Further, the bank submitted that it was entitled to call on all remedies available to it to recover the amount outstanding under the loan agreement.
Second defendant's argument
Rickard refused to pay CBA any amounts owing under the guarantee. Rickard complained that CBA should not be entitled to enforce the guarantee in circumstances where it was the mortgagee in possession and had done little to market the properties for sale or rent; if Rickard was in possession, he could cause RHT to market and/or fix the semi-completed properties. Rickard argued that CBA's failure to do anything with the properties in the 18 months that it had held them disentitled it from collecting moneys from Rickard under the guarantee. Rickard further argued that CBA's conduct was contrary to its duty to be fair and amounted to unconscionable conduct.
Rickard had engaged two experts who gave evidence that, until December 2012, the bank had done little to maintain the properties (for which the bank was collecting rent) adequately and also did little to market the properties for sale and rent adequately.
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 rate of A$1,468.31 a day.
Rickard sought for the proceedings to be stayed until the properties had been sold, or alternatively that the bank's claim be dismissed. In order to establish that CBA's dilatory conduct was unfair and caused prejudice to Rickard, he relied on Palk v Mortgage Services Funding plc.
In Palk, the UK 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 the sale because she believed that the property market would fall and that 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 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".
In the case at hand, 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.
Therefore, CBA was found to be entitled to enforce the guarantee and Rickard was ordered to pay CBA A$1.9 million. However, as noted above, he was not required 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 little to market it for sale if, in so doing, the guarantor is subject to prejudice and therefore unfairness. This shift is noteworthy given that banks have historically been able to rely on longstanding banking principles that allow them to sell whenever they see fit. It appears that banks must now give greater consideration to the mortgagor or guarantor when deciding to wait to realise properties in possession, and must take active steps to sell or rent the property or risk having payment under a guarantee reduced.
The court nonetheless affirmed that the bank could call on any of the remedies available to it either by taking possession of the properties or through the enforcement of a guarantee.
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