In the recent case of Commonwealth Bank of Australia v Thompson  NSWSC 149 the New South Wales Supreme Court considered the duties of a mortgagee in possession to the mortgagor when realising a secured asset.
As part of a loan agreement entered into between the Commonwealth Bank of Australia (the Bank) and a property development company (the company) in 2005, the company provided a mortgage to the Bank over properties as security, and one of the directors of the company (the guarantor) gave a guarantee and indemnity (the guarantee) to the Bank in relation to money owed by the company.
The loan agreement was varied on multiple occasions, but on 31 August 2009, the existing loan facility expired with the company in breach and liable to repay the money advanced by the Bank. In April 2011, the Bank took possession of the properties under its security and in September 2011, the Bank commenced proceedings against the guarantor for the outstanding debt.
The terms of the guarantee were not in dispute, nor was the Bank’s power to enter into possession and its power of sale. But the guarantor argued that the proceedings should be stayed until the security properties had been sold or dismissed altogether, because the Bank’s delay in selling the properties had prejudiced the guarantor by preventing the company selling or improving the properties in order to pay off the outstanding debt to the Bank.
The guarantor relied upon the UK Court of Appeal decision in Palk v Mortgage Services Funding plc. and submitted that the Bank as mortgagee did not have an unfettered discretion to delay a sale indefinitely, and that the Bank’s inaction breached their duty to act fairly towards the mortgagor company and inturn the guarantor.
The court considered expert evidence submitted by the guarantor and held that the Bank did “very little” to market or sell the properties between April 2011 and December 2012. During this time interest was accruing on the guarantor’s debt at the rate of $1,468 a day. Despite four of the nine properties being rented, the rent collected by the Bank was not enough to cover the accruing interest. However on the last day of the hearing, the Bank conceded that it was only seeking recovery of the principal debt, the costs of enforcement on an indemnity basis and interest running from the date of judgment, and that it was no longer pursuing the interest on the principal debt that accrued during the period in which the Bank was “dilatory”.
As a result of that concession and the Bank’s actions in marketing the property for sale since December 2012, the Court held that much of the prejudice suffered by the guarantor as a result of the Bank’s inaction “has been ameliorated”.
The Court subsequently found that the Bank was entitled to enforce the guarantee and ordered the guarantor to pay the Bank the principal debt, the costs of enforcement on an indemnity basis, with interest accruing only from the date of judgment.
The critical comments by the Court towards the Bank’s inaction in realising the secured asset should serve as notice to mortgagees in possession that whilst a lender is not obliged to realise their security, when they do enter into possession of a secured property they must act fairly towards the mortgagor. Acting fairly will likely extend to taking active steps to sell or maintain the property, including making payments for marketing, maintenance and possibly improvements.
If these steps have not been taken, the lender may be found to have prejudiced the borrower and to have not acted in good faith, which may affect the amount recoverable by the lender from the borrower and/or any guarantor.