Mortgagee Sales - Conducting them and avoiding them

Mortgagee Sales – Conducting them and avoiding them.

Increased costs, delays in the delivery of building materials and banks tightening of loan criteria have been contributing to the recent tightening of the property market. These factors along with increasing interest rates have started to create an easing in the price of property. We are certainly hearing of more instances of failed developments and mortgagee sales with media reports almost weekly of failed developments. We expect Mortgagee sales are likely to become more common in the current climate and we are certainly seeing more advertisements relating to distressed vendors trying to sell property quickly.

A mortgagee auction or sale is where a lender (usually a bank) that holds a security interest over a property forces the sale of the property. It is generally a “last ditch” attempt from the lender to recover its money and happens when the owner has defaulted on a loan agreement. To be clear banks are not the only lenders that can take a property to mortgagee sales, finance companies, private lenders and even the bank of mum and dad may have the ability to force the sale of a property it holds an interest in.

A mortgagee sale does not happen overnight, and before pursuing a forced sale a lender must consider the following factors before applying for enforcement:

1. Is the loan contract a consumer credit contract?

The Consumer Credit Contracts and Consumer Finance Act 2003 (CCCFA) specifies what kind of loan contract is considered to be a consumer credit contract. Loan agreements are considered to be a consumer credit contract if the borrower is a private individual entering into the agreement for predominately domestic purposes and has to pay interest. Additionally, the lender will need to be in the business of lending money.

If a loan contract is a consumer credit contract, then the lender must comply with stricter "responsible creditor" requirements, and there will be more compliance requirements in the mortgagee sale process. It is important to note that borrowing by trustees of a trust and in most commercial lending situations will not be captured under the CCCFA.

2. Have all the other steps been taken by the lender before calling for a mortgagee sale?

There is a process that lenders must follow before obtaining the power to exercise a mortgagee sale.

The first step is naturally the need for a default in the contract (also known as the loan agreement), the most common of which includes a failure of the borrower to meet payments dates and other payments such as interest not being repaid on time.

In addition, other faults such as demolishing the property without the lender’s consent, providing false information, defaulting on other loan conditions such as not paying rates or failing to keep the property insured are likely to be considered breaches which could ultimately end up with a property in a mortgagee sale situation.

Once a default is established, the lender will likely first issue a notice to the borrower and the mortgagor (the owner of the property which is secured by mortgage).

Notices will indicate the type of default, amounts that need to be paid by and the time frame in which a borrower has to correct the default.

If the default is not corrected after the demand notice is issued, the next step for the Lender is to issue the Property Law Act 2007 (PLA) notification. Section 120(1)(c) of the Act provides the requirements as to the form of the notice to be given before a lender can obtain a power to sell the mortgaged land. The Act requires creditors to be given a statutory notice period during which the borrower and mortgagor must remedy the breach. The time frame outlined in the Act states that the notice period must not be less than 20 working days. This has been a contentious legal issue in the past and ensuring the time frames have been met correctly is extremely important.

If the mortgagee serves the notice in the correct form then ultimately if the default remains unremedied following the lapse of the time frame in the notice the lender as mortgagee is entitled to:
a) Enter into possession of the mortgaged land
b) Manage land or demand and recover income from the mortgaged land (collect rent from tenants)
c) obtain the power to sell the mortgaged land.
The mortgagee does not become the owner of the property but only the party that can enforce the rights in order to recover to repay its initial loan amount, overdue arrears, interest, and related sale and legal costs.

Assuming all the conditions outlined above are met, the property can then be listed for sale as a mortgagee sale. The method of sale used must be the most appropriate for the property market and usually a mortgagee auction is the chosen option, although sale by Tender, and Negotiation are also options commonly used.

Section 176 of the Land Act 2007 stipulates that the creditor's actions must be for a legitimate purpose and that the Lender must obtain the best sale price under reasonable circumstances. During the sale process, it is recommended to use an experienced appraiser to estimate the sale value of the property and a reputable sales agent to advertise and market the property, so that the property can be given sufficient market promotion and any sale deemed to be a fair arm’s length market transaction.

If the proceeds of the auction are less than all debts, the mortgagee has the right to continue to pursue the remaining amount. Conversely if there are funds left over after all debts have been repaid these are passed to the owner/borrower.

If you are a homeowner in distress, we recommend that you obtain urgent advice and work with your borrower or a financial advisor to restructure the lending on your property. Don’t bury your head in the sand deal with the issue before it becomes unmanageable, and a mortgagee sale becomes the only option. Mortgagee sales can be costly, and it is often better to sell the property while you are in control rather than take on the extra stresses and costs that will undoubtedly eventuate with a mortgagee sale.

Whether you are Lender that would like further advice on exercising your rights as mortgagee over a property or you are a borrower in distress get in touch with our experienced property disputes team to help you guide you through. At Turner Hopkins we have the specialist knowledge to assist whatever your situation.