What is a Mortgagee Sale?
When a homeowner is in default under the conditions of their mortgage, the bank or lender has the power to take action under the PLA which could involve the sale of the property.
The main point of difference with a mortgagee sale, is that the sale of the property is under the control of a financial institution rather than the owner.
So, as always, it is the responsibility of the prospective buyer to do their homework into the recent prices of similar properties sold in the local market.
There are several risks involved with buying at a mortgagee sale, for example, there is no guaranteed vacant possession, and the new owner may be liable for any outstanding rates, body corporate fees or other payments (refer to individual contract for sale conditions in relation to outstanding payments).
Lenders are not required to supply building reports or disclose unapproved construction work.
So it’s important to take the time to do your own research and ask your Harcourts Sales Consultant about these risks. Check the sale and purchase agreement carefully before committing.
• Vendor = Mortgagee = Lender
• Owner = Mortgagor= Borrower
• Purchaser = Buyer under the Mortgagee sale
• PLA = Property Law Act 2007
• Property = Land and buildings on the land but excluding fixtures and chattels
• Property = The land as described in the legal description on the mortgage
• Mortgage = The mortgage under which the mortgagee has its power of sale
• Default Notice = Notice under s120 of the PLA
• Default Notice Period = A minimum of 20 working days from service of the notice
• Non-Registrar Sale = Private mortgagee sale
Background details on legislation relation to mortgagee sales
• Section 103A of the Property Law Act 1952 was the underpinning legislation on the sales process for Mortgagee Sales. This Act has now been repealed and replaced with the 2007 Act.
• Essentially the obligations are similar however they have been strengthened.
What triggers right to sell
• Mortgagee issues a PLA Notice of Default
• Notice time frame usually 20 working days minimum from date of service
• Mortgagor must remedy default within that time frame (default can be one or many of the following reasons. Non-payment of rates, body corporate fees, mortgage payments, lack of insurance etc.).
• If not then mortgagee can elect to sell
The property Law Act – Duty of Care
Section 175 of the PLA provides as follows:
175 Duty of Mortgagee exercising power of sale
A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under s186, or through a court under s199, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale:
1. The current mortgagor:
2. Any former mortgagor:
3. Any covenantor:
4. Any mortgagee under a subsequent mortgage:
5. Any holder of any other subsequent encumbrance:
This section now extends the duty to a number of interested parties and puts the selling mortgagee under additional scrutiny during the sale process. It also raises a number of issues. A covenantor will be able to raise this as a defencein a claim for any shortfall.
• The duty of care does not qualify the mortgagees’ right to decide, in its own interest, if and when to sell, although once a mortgagee decides to sell it becomes subject to the duty. A mortgagee can decide in its own interest if and when to sell. Apple Fields Ltd vs Damesh Holdings Ltd (1990) 2 NZLR 586 which observed that “a duty to sell at a particular time or at all would make the business of lending almost impracticable”
• There is no obligation on a mortgagee to delay a sale to obtain a higher price and nor will it be penalised for delay. The time for assessing whether the price is the best price reasonably obtainable is the time of sale.
• A forced sale valuation recognises, amongst other things, that the vendor may not obtain the full market price for the property because of circumstances that are inherent in forced sales. To what degree the property will be marked down because of a forced sale is a matter of fact in each case...The failure to achieve the market value of the property on a mortgagee sale does not necessarily give rise to an inference that the mortgagee has breached his/her duty to take reasonable care.
Guarantors and Subsequent Mortgagors
• In Clark v UDC Finance Ltd it was confirmed that the mortgagee’s duty of care was owed to guarantors. The duty was expressed as a tortious one.
• Mortgagor is defined in the PLA “any person deriving title under the original mortgagor, or entitled to redeem a mortgage, according to his estate, interest or right in the mortgaged property”.
• In Apple Fields (supra) the Court of Appeal held that a subsequent mortgagor falls within this definition.
•However it does not include a guarantor who may have some rights of subrogation, but no estate, interest or right in the mortgaged property.
What is being sold?
Does the sale include all buildings on the land?
Chattels and fixtures may be specifically excluded by the mortgagee as a mortgage is a charge on land and buildings not chattels.
Fixtures and chattels are generally excluded
Take care with transportable buildings as the mortgagee may or may not have the right to sell these
Owner/Mortgagor holding over is when the owner fails to vacate the property on settlement. It is the purchaser’s problem to obtain vacant possession not the mortgagee.
Marketing and advertising mortgagee sales
• Registrar Sales – As per registrar’s rules
• Private Sales – Disclose as “Mortgagee Sale”
• Commerce Commission ruling on the need to disclose
•An organisation is in breach of the FTA s14 (1) (b) by not “disclosing” mortgagee sale on advertising copy.
If you have any further questions about Mortgagee Sales feel free to contact our Harcourts Grenadier City office on (03) 379 6596 to be put through to our mortgagee division.