Mortgagor alleges breach of duty of care when selling property amid COVID-19 pandemic
This week’s TGIF considers Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd  CSV 381a recent Supreme Court of Victoria decision that focused on the effect of COVID-19 on the property market, through the lens of a mortgagee’s obligations under Section 420A of the Corporations Act 2001 (Cth).
Key points to remember
- Section 420A of Companies Act 2001 (Cth) (the Law) provides that a mortgagee must take reasonable care to sell property for at least market value or the best price possible under the circumstances. It is a holistic assessment of the mortgagee’s conduct as a whole, with reference to the dynamic circumstances that the mortgagee faced at the time of the sale.
- The COVID-19 pandemic was and is one of those dynamic circumstances.
- In making this assessment, a court will focus on the processes undertaken by and the conduct of the mortgagee exercising the power of sale. This may include engaging experienced agents, accurately valuing and appraising the property, obtaining advice on the impact of external factors (such as the COVID-19 pandemic) or undertaking appropriate marketing campaigns.
The applicant (Manda) advanced $6.39 million to the first defendant (PEC) under a loan agreement (the Loan agreement) which was secured by property in the Melbourne suburb of Springvale, together with a personal guarantee and indemnity from the second defendant (the Guarantor).
PEC defaulted under the loan agreement and Manda exercised its right to take possession and sell the Springvale property (the Property). The property was sold for $7 million on December 22, 2020, which was settled on March 23, 2021.
However, the amount still owed under the loan agreement exceeded the proceeds from the sale of the property. On May 5, 2021, Manda sent a letter to PEC and the Guarantor (together on Defendants) demanding repayment of the balance. In the absence of payment, Manda initiated proceedings on March 11, 2022 to recover the balance.
The defendants admitted their default under the loan agreement and accepted the unpaid debt, however, the defendants also filed a counterclaim against Manda, claiming that Manda’s sale of the property violated Section 420A of the law.
The claims of the defendants
Defendants argued that Manda breached its duty of care in exercising its power of sale by failing to take all reasonable steps to sell the property for market value. In particular, they alleged that:
- the property sales campaign was too short (four weeks) and that an extended campaign was required due to Melbourne’s long-term COVID-19 lockdown in the second half of 2020;
- Manda should have extended the campaign given the quality of the offers she had received, rather than concluding the sale contract for the Property; and
- the advertising strategy was unsuitable, as it gave “undue prominence” to the fact that the sale was a mortgage sale.
Defendants elaborated by arguing that the COVID-19 lockdown had limited potential buyers’ ability to engage in the expression of interest process, as it affected their ability to conduct their business – for example, retain services. a lawyer or conduct a site inspection – in a timely manner.
Judge M Osborne ultimately dismissed the defendants’ counterclaim, entering judgment for Manda and determining that Manda had not breached his duty of care in violation of Section 420A.
His Honor first reviewed recent case law regarding Section 420A and reaffirmed that an assessment to determine whether a mortgagee had exercised their power of sale improperly must be conducted “holistically with reference to the dynamic circumstances faced by the controller at the time”. As such, Ms Osborne J focused her judgment on Manda’s conduct and the sales process she undertook, given the context of the prolonged COVID-19 lockdown in place in Melbourne at the time.
First, His Honor determined that a four-week sales campaign was entirely adequate, if not the best practice in the circumstances, because:
- the estate agents hired by Manda were particularly experienced in the market for building land in the inner suburbs of Melbourne;
- the campaign generated considerable interest; and
- the property sold for $7 million, which exceeded its 2020 market value and was within the range of the agent’s sales estimate.
Second, Manda and Defendants presented evidence of “market fatigue” and adequate campaign length, in light of the COVID-19 lockdowns. Judge M Osborne preferred Manda’s experts, as the defendants’ expert was more general and speculative in his estimate.
In particular, His Honor noted that there was no guarantee that, had the campaign been extended to 2021, a price better than $7 million would be achieved – especially given the strong expressions of interest. during the initial campaign and classification of the property as a ‘mortgage sale’.
Finally, Manda and the Defendants presented evidence regarding the Property’s advertising strategy. The defendants argued that the term “mortgage sale” reflected a fixation on selling the property quickly and “without due regard to the best price obtainable”, such that Manda breached its obligations under the 420A. Manda argued that this process was standard practice and signaled to interested parties that they weren’t wasting their time with an “unrealistic vendor who may just be testing the market”. In the end, Mr Osborne J again preferred the experts at Manda, given the selling price of the property and the expertise of everyone involved.
This decision recalls that the duty of a mortgagee under Section 420A of the Act is to “take reasonable care to sell a property… having regard to the circumstances”. When assessing whether a mortgagee has breached its obligation to exercise the power of sale, a court will consider the conduct of the mortgagee as a whole throughout the sale process.
This includes reviewing whether the mortgagee has engaged experienced agents, obtained appraisals and considered the appropriateness of advertising strategies, as well as reviewing the impact of any external factors – which in this case includes the coronavirus pandemic. COVID-19.