2 July 2009

A man’s home is his castle

The recent case of Nolan v MBF Investments Pty Ltd [2009] VSC 244 is authority for the proposition that the interest of a mortgagor, grantor or other person protected by section 77(1) of the Transfer of Land Act 1958 (TLA) is not confined to a proprietary interest in the proceeds of sale.

His Honour Justice Vickery found that MBF Investments Pty Ltd (MBF) as mortgagee in possession had sold Mr Nolan’s (the mortgagor) home in contravention of the statutory duties of sale provided in section 77(1) of the TLA.

Section 77(1) of the TLA provides that:

If within one month after the service of such notice or demand [the notice to pay or demand on a default under section 76] or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell [the mortgaged land]…

There are no previous reported cases in Australia of a court finding a mortgagee to have contravened section 77(1) of the TLA by not having regard to the mortgagor’s ‘home occupation interest’.

Background

  • The plaintiff, Mr Nolan, was the registered proprietor of a property situated at 16-18 Walmer Street, Kew (property) and lived in the dwelling house with his family.
  • The property was subject to a first mortgage granted by Mr Nolan in favour of MBF and second mortgage in favour of ANZ Bank.
  • Mr Nolan fell into default under the MBF mortgage. MBF served a notice to pay under the MBF mortgage and pursuant to section 76 of the TLA on Nolan giving him notice that he had failed to pay all the interest payable under the MBF Mortgage and demanded payment of the whole of the outstanding moneys secured by the mortgage. It gave further notice that if the whole amount demanded was not paid within seven days, it would exercise the power of sale pursuant to section 77 of the TLA.
  • The total amount owing under both the MBF mortgage and ANZ mortgage was approximately $1,550,000.
  • In or about May 2001 MBF determined to exercise it power of sale pursuant to the mortgage and section 77 of the TLA and sell the property at public auction. Mr Nolan proposed to MBF that it sell the property as three lots.
  • Mr Nolan believed that if sold as three lots as opposed to one lot the property would achieve a better price. Mr Nolan had a valuation that supported this proposition. MBF initially rejected the proposal and insistedon taking possession of the property. Mr Nolan issued proceedings to obtain and order that the property be subdivided before sale and it was subsequently agreed with MBF that the property would be subdivided into three separate lots before sale.
  • Mr Nolan further proposed that lots 2 (vacant land) and 3 (old tennis court) be sold first, so if the proceeds of the sale of these lots were sufficient to pay out the mortgage debts he could retain lot 1 (family home). MBF did not agree to this proposal.
  • The property was sold at auction by MBF in August 2001. MBF’s decided to sell lot 2 (vacant land) first and then lot 1 (family home) and finally lot 3 (old tennis court). Mr Nolan continued to request that lots 2 and 3 be sold first and only if there were insufficient funds to pay out the mortgage debts should lot 1 be sold.
  • On the day of auction MBF was informed by its real estate agents that an offer of $975,000 had been made for lot 2 (vacant land) and it was likely that lot 3 (old tennis court) would sell for somewhere between $600,000 to $650,000. MBF were advised that it could not be guaranteed that the sale of lots 2 and 3 would clear the mortgage debts, but there remained an excellent prospect that this could be achieved.
  • Despite the above advice MBF proceeded to sell lot 2 first followed then by lot 1 and lot 3. Lot 2 proceeded to be sold for $1,305,000, well above the expected value. Despite only needing approximately another $200,000 to discharge the MBF debt, MBF proceeded to sell lot 1 (family home) instead of lot 3 (old tennis court).
  • Lot 1 was sold at auction for $915,000.
  • Following the sale of Lots 1 and 2 MBF had no need or right to sell lot 3, however Mr Nolan requested that lot 3 be sold.  Lot 3 was sold for $690,000.
  • Mr Nolan issued proceedings against MBF seeking orders, amongst other things, that MBF contravened section 77 (1) of the TLA and damages.

Home occupation interest

His Honour found that:

Mr Nolan had a home occupation interest in the house lot (Lot 1), over and above his interest in the vacant Lots 2 and 3. This interest may be characterised as:  the use and enjoyment of the dwelling house situated on Lot 1 for home occupation as an incident of his legal interest in the property as the owner of the estate in fee simple. His home occupation interest in Lot I remained until the time when his legal interest and his right to redemption were destroyed by the mortgagee [MBF] upon it entering into a binding contract of sale on the day of the auction, 18 August 2001.

Duty of mortgagee

His Honour found that a mortgagee in possession has the following duty when it sells a property the subject of a mortgage:

In selling a property pursuant to the exercise of the statutory power of sale, the mortgagee is required under section 77(1) to have regard to the interests of the mortgagor, grantor or other persons, in the sense of taking reasonable care to protect the interests of those persons, consistent with its entitlement to realise its security.

In this way, the mortgagee will be entitled to exercise its legal right to sell the mortgaged property in aid of its right to repayment of the moneys it is owed.  At the same time, a reasonable measure of protection for the legitimate interests of the mortgagor is provided, consistently with the rights of the mortgagee.

The test so stated is applicable to the circumstances of this case. The home occupation interest which Mr Nolan had in Lot 1 was an interest to which the mortgagee was compelled to have regard in the exercise of its power of sale pursuant to section 77(1) of the TLA.

Breach of duty

His Honour was critical of MBF’s conduct in the sale of the property and found that:

In exercising its power of sale in the way it did, MBF carried into effect the indirect object of destroying Mr Nolan’s legal interest in the land by depriving him of full ownership of the property by the exercise of his right of redemption…

MBF completely disregarded Mr Nolan’s interest in the property, namely his right to redemption which, if exercised as it would have been on the sale of Lots 2 and 3, would have resulted in him retaining Lot 1 as an unencumbered estate in fee simple. Further, the use and enjoyment of the dwelling house situated on Lot 1 for home occupation, which had been so assiduously brought to the attention of MBF over the months preceding the auction sale, was lost.

…MBF recklessly dealt with the property in a way which sacrificed the interests of the mortgagor. The decision of MBF taken… to sell Lot 1 at the auction was not made in good faith, having regard to the relevant ‘interest’ of the mortgagor pursuant to section 77(1) of the TLA. The conduct was also manifestly unreasonable.  It was not founded on the evidence available nor was it founded on principle.  It amounted to an arbitrary interference of the most serious kind with Mr Nolan’s right to continue in occupation of his home.

… the defendant was guilty of wilful default in conducting the auction sale of the plaintiff’s property on 18 August 2001 and consequently, acted in breach of its obligations under section 77(1) of the TLA.

Lesson learned

  • Mortgagees are on notice that they must have regard to all interests a mortgagor may have in a property.  The duty of sale is just not limited to a duty to sell the property for value but also a duty to have regard to the mortgagors ‘home occupation interest’;
  • where a debt is secured by mortgages over separate parcels of land and one parcel of land has the mortgagor’s home situated on it careful consideration should be given to which parcel of land is sold first and every opportunity should be given to the mortgagor to retain his or her home; and
  • mortgagees should always be conscious of their obligations to act reasonable when exercising their power of sale and have careful regard to the interests of the mortgagor.

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