Thinking | 1 August 2022
First judicial decision on a mortgagee sale during COVID-19 restrictions
In the recent decision of Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd  VSC 381 (Manda v PEC), the Victorian Supreme Court decided in favour of a lender/mortgagee that was alleged to have breached its duty in exercising a power of sale over the mortgaged property under section 420A of the Corporations Act 2001 (Cth).
Manda v PEC is the first reported final decision which considered the effect of COVID-19 lockdowns on the property market in the context of a mortgagee discharging its duties under section 420A of the Corporations Act.
Section 420A of the Corporations Act relevantly provides that:
(1) In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
(a) if, when it is sold, it has a market value--not less than that market value; or
(b) otherwise--the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
Section 420A imposes a more rigorous duty on a mortgagee or receiver than that provided by the general law duty of good faith. However, the more rigorous duty does not detract from the common law principle that a mortgagee:
- may sell at the time of its choosing; and
- does not have to wait until a time when a better price might be obtained.
In this case, Justice Osborn referred to the leading authority of Boz One Pty Ltd v McLellan (Boz One) and confirmed that the relevant legal principle to be applied in determining whether section 420A of the Corporations Act has been breached is (emphasis added):
‘whether the controller has failed to do what a reasonable and prudent person would do or has done what a reasonable or prudent person would refrain from doing in the circumstances.’
Justice Osborne also reaffirmed the authority in Boz One that (emphasis added):
‘As the authorities illustrate, what must be done to comply with this general obligation will depend on the circumstances of each case, including the nature of the assets being sold and the circumstances of the chargor…
In deciding whether a controller’s failure to take a particular step constitutes a breach of s 420A(1)(a), that step should not be considered in isolation. Rather, the court should consider the controller’s conduct as a whole in the context in which the controller was required to make decisions about which steps to take and which steps not to take. The controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time.’
The COVID-19 pandemic and associated lockdowns had an adverse impact on the property market in metropolitan Melbourne (including because less properties were advertised and sold).
Accordingly, the ‘dynamic circumstances’ that existed because of COVID-19 had to be considered by the Court in order to determine this case.
The plaintiff, Manda Capital Holdings Pty Ltd (Manda), advanced $6.39 million (Loan) to the first defendant, PEC Portfolio Springvale Pty Ltd (PEC). The Loan was made pursuant to a loan agreement dated 28 August 2019 (Loan Agreement) and was secured by a registered mortgage over a property in Springvale, a suburb of Melbourne (Property).
The second defendant (Guarantor) provided a personal guarantee and indemnity in support of the Loan.
Following default by the borrower, Manda entered into possession of, marketed and sold the Property for $7 million pursuant to a contract of sale dated 22 December 2020 (Contract of Sale).
A four-week expression of interest campaign was held from 10 November 2020 to 8 December 2020. This was in the context of Melbourne having been in an extensive lockdown that had only recently ended on 27 October 2020 (although various restrictions, such as density limits, remained).
As the amount owed under the Loan Agreement exceeded the proceeds of sale from the Property, on 5 May 2021 Manda sent a letter to PEC and the Guarantor (together to be referred to as PEC) demanding that PEC repay the balance.
On 11 March 2022, Manda commenced proceedings against PEC seeking orders for repayment of the outstanding debt (circa $1.2m) owing under the Loan Agreement.
PEC admitted the default under the Loan Agreement and accepted the outstanding debt under the Loan Agreement. However, PEC brought a counterclaim against Manda, contending that Manda’s sale of the Property breached section 420A of the Corporations Act.
PEC alleged that if Manda sold the Property in accordance with its duties under section 420A, it would have achieved a price of $7.8 million (being the value of the Property ascribed by PEC’s expert as at 14 December 2020 and 23 March 2021) which would have extinguished the outstanding liability owing under the Loan Agreement as at the date of settlement of the Property. Accordingly, PEC sought that Manda’s claim be dismissed.
PEC’s case was that Manda contravened section 420A of the Corporations Act by failing to take all reasonable steps to sell the Property for market value. In support of its counterclaim, PEC alleged that:
- the sales campaign was too short, and a longer sales campaign was warranted given the impact of the COVID-19 lockdowns (including the delays in mobilising solicitors and consultants to enable proper due diligence to occur);
- Manda should have extended the campaign into 2021 in light of the quality of the offers that it had received rather than entering into the Sale Contract; and
- the proposed advertising strategy was inapt in that it gave undue prominence to the fact of the sale being a ‘mortgagee sale'.
In relation to the impact of COVID-19 lockdowns, Manda argued that the lockdowns increased uncertainty in the property market and would continue to do so in the first half of 2021.
PEC argued that the lockdowns delayed potential buyers’ ability to engage in the expression of interest (EOI) process because they reduced the capacity of individuals to conduct their affairs in a timely manner, even after the restrictions were removed.
The crucial issue at trial was the steps taken by Manda to sell the Property.
Steps taken by Manda to sell the Property
Manda took the following steps to sell the Property.
- In September 2020, Manda sought and obtained sales and marketing proposals from Gross Waddell and Savills, which:
- recommended selling the Property by way of an on-market four-week EOI campaign, with EOIs to close in late November/early December 2020, which was:
- dependent upon the State-imposed COVID-19 lockdown being lifted; and
- supported by an anticipation that there would be a surge in distressed sales which would lead to deflated pricing in the market in early 2021;
- recommended Manda wait for the current restrictions to ease prior to commencing the EOI campaign;
- noted that COVID-19 had impacted the market, and there had been limited transactions during the previous six months;
- recommended that the advertising material state, where applicable, that the sale was ‘under instructions from mortgagee’, as this would provide interested parties with the comfort that the marketing of the Property was bona fide (as opposed to the vendor ‘testing’ the market); and
- noted that the Property had an existing planning permit for a hotel and an operating heads of agreement with Hyatt Hotels, albeit that the possibility of a hotel development on the Property was low given the present and anticipated state of the tourism market during the COVID-19 pandemic.
- recommended selling the Property by way of an on-market four-week EOI campaign, with EOIs to close in late November/early December 2020, which was:
- Gross Waddell and Savills were engaged by Manda on a joint basis and instructed to specify a marketing budget of approximately $25,000.
- A formal sales authority was signed on 21 October 2020, which included references to an estimated sale price of between $7 million and $7.7 million.
- A marketing brochure was distributed, and signboards for the Property were erected on site, which described the Property as a ‘mortgagee sale’.
- When the EOI campaign closed on 8 December 2020, there had been 145 enquiries, 16 requests for contracts, and three parties had lodged EOIs in the following terms, which were each subject to conditions:
- $6,500,000 with a 5% deposit and settlement in six months;
- $5,850,000 with a $350,000 deposit and settlement in 12 months; and
- $4,520,000 with a $200,000 deposit and settlement in 21 days.
- Considering that the offers were below the estimated sales price, Manda consulted with its real estate agents as to whether it should extend the EOI period. Manda was advised that:
- there was no merit in extending the campaign as doing so would signal that the seller was desperate and that the EOI campaign had not yielded sufficient interest; and
- a preferable strategy would be to negotiate with the offerors who had lodged EOIs with the aim of increasing their offers.
- Manda accepted the agents’ recommendation and did not extend the campaign.
- The attempts to procure higher offers were successful, and on 14 December 2020 the purchaser made an offer to purchase the Property for $7 million with a 5% deposit and settlement in three months (this was significant given that interest was accruing under the Loan Agreement at around $110,000 to $130,000 per month).
- On 15 December 2020, Manda obtained an updated valuation of the Property from Charter Keck Cramer which specified a current market value of between $6.2 million and $6.7 million.
- On 22 December 2020, Manda accepted the $7 million offer and signed the Sale Contract.
The Court held that there was little merit in PEC’s counterclaim, and the grounds alleged did not substantiate any breach of Manda’s duty under section 420A of the Corporations Act.
Justice Osborne’s findings in respect of each of PEC’s arguments are summarised below.
Length of sales campaign
Justice Osborne had no hesitation in concluding that a four-week campaign was entirely adequate, if not best practice, in the circumstances, because:
- Gross Waddell (and Mr Gross) and Savills (and Mr Baxter) were extremely experienced real estate agents, and had particular expertise in the property market for development sites in inner suburban Melbourne;
- the four-week campaign attracted considerable interest; and
- the sales campaign generated a sale for $7 million, which was within the range, albeit at the lower end, of the agent’s estimate, and exceeded the market value of the Property as assessed by Charter Keck Cramer on 15 December 2020.
Failure to extend the campaign
PEC’s expert provided the opinion that the agents ought to have recommended that Manda extend the campaign period beyond the four weeks and conduct a private sales campaign in February 2021 ‘rather than selling the property at the bottom of the quote range as a result of a relatively truncated campaign which generated limited interest’. His opinion was that this would have countered the ‘market fatigue suffered by purchasers after 150 days of lockdown in 2020’.
Manda’s experts’ views were that readvertising the Property in the New Year would convey to the market that the sales campaign in late 2020 had failed, which would remove the competitive tension from the sales process. Further, extending the EOI campaign was risky as it would result in additional interest accruing under the Loan Agreement.
Importantly, PEC’s expert was not provided with a copy of the Charter Keck Cramer valuation carried out on 15 December 2020 until two days after his report was produced on 9 March 2022. PEC’s expert noted that this updated valuation might have altered the opinions he expressed in his report.
The Court ultimately preferred the evidence provided by Manda’s experts due to the significant element of generality and speculation of PEC’s expert. It was relevant that the EOI campaign generated significant enquiries and ultimately led to a sale in a difficult (post COVID-19 lockdown) market and at a price within the range of the expectations set by the agents and in excess of Charter Keck Cramer’s most recent valuation.
The references to ‘mortgagee sale’ in the sales brochure and on the signboards
PEC argued that the references to ‘mortgagee sale’ in the sales brochure and the signboards were unduly prominent and that this suggested a fixation with selling the Property quickly and without regard to the best obtainable price.
Manda argued that it is common practice for properties to be advertised as mortgagee sales, as this indicates the existence of a motivated vendor who wants to sell the property and is not merely testing the market. Manda’s expert considered that this was particularly appropriate for the Property during the COVID-19 lockdowns.
The Court preferred the evidence from Manda’s experts.
This case emphasised that, in assessing a mortgagee’s compliance with the duty to exercise the power of sale, the Court will look at the mortgagee’s conduct as a whole with reference to the dynamic circumstances that the mortgagee faced.
The lender was successful here because it engaged reputable agents, carefully considered and followed their advice, and ensured it obtained contemporaneous valuations.
In 2020 and 2021, mortgagees faced dynamic circumstances due to the COVID-19 pandemic and the unprecedented impacts of lockdowns on the property market (particularly in metropolitan Melbourne). While the lockdowns have now eased, COVID-19 continues to affect many industries, and the threat of further disruption remains.
More broadly, this case serves as an important reminder that a mortgagee’s duty under section 420A of the Corporations Act is not to obtain the best possible price. Rather, it is to ‘take all reasonable care to sell the property for not less than market value and otherwise, for the best price reasonably attainable having regard to the circumstances’.
In determining whether this duty has been discharged, as has been well established by the case law, a Court will examine the process adopted by a mortgagee. In order to reduce their exposure to potential liability from a breach of their duty, we recommend that mortgagees:
- ensure that a recent valuation has been obtained for the property;
- run a public sales process (absent extraordinary circumstances);
- obtain appraisals from various experienced real estate agents to manage the sale process;
- obtain advice from their real estate agent regarding the recommended process to sell the property and otherwise as required throughout the sales process;
- retain copies of all documents that are relevant to the sales process (for instance, most real estate agents will provide evidence on the number of enquiries into the property etc);
- retain copies of all communications regarding the sales process and ensure they are in writing (where possible);
- carefully consider the form and substance of advertising material (noting that advertising a property as a ‘mortgagee sale’ may not be justified, but may indeed be preferable in some circumstances);
- consider the counterfactual position when considering whether to extend a sales campaign or reject an offer (ie a higher price would need to recoup any additional sales costs and interest under the mortgage); and
- consider the impact of external factors such as COVID-19 lockdowns and get written advice on how this will affect the sales process from their real estate agent.
 Investec Bank (Australia) Ltd v Glodale Pty Ltd  VSCA 97, .
  VSCA 68.
 Ibid .
 Ibid –.
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