Recent Case - Kravchenko v The Rock Building Society [2009] VSCA 292

(Mortgagee's Sale to Person Connected to the Mortgagee prior Auction)

In this case, the Victorian Court of Appeal considered a mortgagee's statutory duty[1] to act in good faith and have regard to the interests of the mortgagor in exercising its power of sale. The statutory principles regulating a mortgagee's power of sale are broadly consistent with the common law, and the case provides general guidance to mortgagees when exercising its power on a mortgagor's default.

Facts

The mortgagee sold the property to an employee of the mortgagee's solicitors for $360,000 in April 2006. The property had been valued in March 2006 at $350,000. The mortgagee advertised the property in newspapers and on the internet. But instead of sale by auction as recommended by the valuer and agents, the property was disposed of by private sale to the employee.

The mortgagor brought an action against the mortgagee and the purchaser seeking to set aside the sale and claiming damages from the mortgagee for breach of its duty to take reasonable care in selling the property at the best price which was reasonably to be obtained. The mortgagor provided evidence from two valuers, fixing the market value of the property at $415,000 and $420,000.

The question is, did the mortgagee act reasonably in relying on its valuation in March 2006 ($360,000) by selling the property to an associated party?

Decision

The trial judge held that, although evidence on the valuation carried out by the mortgagee was unsatisfactory, and the mortgagee did not provide the best opportunity to obtain the highest sale price, the mortgagor failed to discharge the onus of establishing a breach of the mortgagee's obligation.

On appeal by the mortgagor, it was held that

the mortgagee breached its statutory duty;
the mortgagee was required to "fully test the market", which it failed to do by abandoning the auction and accepting an offer from an "insider" at the lower end of the range of estimated sale prices; his Honour noted that the mortgagee's reaction to the employee's offer "was not to ascertain what further steps might be taken to increase the price, but rather to discover whether the offer could be accepted without incurring liability to the mortgagor";
the trial judge was required to determine the value of the property at the time it was sold and, in light of the trial judge's criticisms of aspects of the valuations, should have preferred the evidence of the valuer that fixed the market value at $420,000 (i.e. damages were $60,000);
the identity of the purchaser was relevant to both the onus of proof and the sufficiency of the steps taken to protect the mortgagor's interests and obtain the best price;
the fact that the sale price was within the range of possible sale prices was not sufficient to discharge the burden that a mortgagee must assume when the sale is to an "insider". The mortgagee in such circumstances is under a duty to obtain the best price available.

Practical Implications

This case highlighted the strictness of a mortgagees' duty of good faith, especially when there is a potential conflict, such as in a private sale to an associated party, between a mortgagee's duty to obtain the best price available in the market and its desire to obtain the best bargain for the purchaser.

In summary, the duty of mortgagees when exercising a power of sale is a duty to exercise reasonable care to ensure the property is sold at market value. It is noted that a statutory duty is imposed on mortgagees, under the Property Law Amendment Bill[2] which is currently before the WA Parliament, to take reasonable care to ensure that land is sold for not less than its market value.

To meet this legal requirement, mortgagees should take care to:

take the property to market through use of appropriate advertising and to seek the advice of agents to attract the largest number of potential buyers;
sell the property at an auction when possible; and
obtain a written valuation before sale especially where there is movement in the property market.

[1] s 77 of the Transfer of Land Act 1958

[2] Property Law (Mortgagees' Power of Sale) Amendment Bill 2009 (WA)