TGIF 19 August 2022 – Mortgagor alleges duty of care breach during COVID-19 pandemic property sale

This week’s TGIF considers Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381, a recent Victorian Supreme Court decision that focused on the effect of COVID-19 on the property market, through the lens of a mortgagee’s duties under section 420A of the Corporations Act 2001 (Cth).

Key takeaways

• Section 420A of the Corporations Act 2001 (Cth) (the Act) provides that a mortgagee must take reasonable care to sell a property for not less than market value or the best obtainable price, given the circumstances. This is a holistic assessment of the mortgagee’s conduct as a whole, with reference to the dynamic circumstances the mortgagee faced at the time of sale.
  
  
• The COVID-19 pandemic was and is one such dynamic circumstance.
  
  
• As part of 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. 

What happened?

The Plaintiff (Manda) advanced $6.39 million to the First Defendant (PEC) pursuant to a loan agreement (the Loan Agreement) which was secured by a property in the Melbourne suburb of Springvale, as well as a personal guarantee and indemnity from the Second Defendant (the Guarantor).

PEC fell into default under the Loan Agreement and Manda exercised its right to enter into possession of, and sell, the Springvale property (the Property). The Property sold for $7 million on 22 December 2020, which was settled on 23 March 2021.

However, the amount still owing under the Loan Agreement exceeded the sale proceeds of the Property. On 5 May 2021, Manda sent a letter to PEC and the Guarantor (together the Defendants) demanding repayment of the balance. As no payment was forthcoming, Manda commenced proceedings on 11 March 2022 to recover the balance.

The Defendants admitted their default under the Loan Agreement and accepted the outstanding debt, however, the Defendants also brought a counterclaim against Manda, contending that Manda’s sale of the Property breached section 420A of the Act.

The Defendants’ contentions

The Defendants contended that Manda contravened 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 sales campaign for the Property was too short (four weeks), and that an extended campaign was needed due to the long-term COVID-19 lockdown in Melbourne in the latter half of 2020;
  
  
• Manda should have lengthened the campaign in light of the quality of the offers that it had received, rather than entering into the contract to sell the Property; and
  
  
• the advertising strategy was inapt, as it gave ‘undue prominence’ to the fact that the sale was a mortgagee sale.

The Defendants elaborated by arguing that the COVID-19 lockdown had limited the ability of potential buyers to engage with the expression of interest process, as it affected their capacity to conduct their affairs – for example, retaining a solicitor or carrying out a site inspection – in a timely manner.

Decision

Justice M Osborne ultimately dismissed the Defendants’ counterclaim, awarding judgment for Manda and determining that Manda had not contravened its duty of care in breach of section 420A.

His Honour initially examined recent case law concerning section 420A, and reaffirmed that an assessment of whether a mortgagee had incorrectly exercised its power of sale must be conducted “holistically by reference to the dynamic circumstances that the controller faced at the time”. As such, M Osborne J focused his judgment on the conduct of Manda and the sales process it undertook, with regard to the context of the extended COVID-19 lockdown in place in Melbourne at the time.

First, his Honour determined that a four-week sales campaign was entirely adequate, if not best practice in the circumstances, because:

• the real estate agents engaged by Manda were particularly experienced in the market for development sites in inner suburban Melbourne;
  
  
• the campaign attracted significant 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.

Secondly, both Manda and the Defendants presented evidence as to ‘market fatigue’ and the adequate length of the campaign, in light of COVID-19 lockdowns. Justice M Osborne preferred Manda’s experts, as the Defendants’ expert was more general and speculative in their estimation.

In particular, his Honour noted that there was no guarantee that, if the campaign had been extended into 2021, a better price than $7 million would be achieved – particularly given the strong expressions of interest during the initial campaign and the Property’s classification as a ‘mortgagee sale’.

Finally, both Manda and the Defendants presented evidence as to the advertising strategy of the Property. The Defendants argued that the term ‘mortgagee sale’ evinced a fixation on selling the Property quickly and “without due regard to the best obtainable price”, such that Manda contravened its obligations under section 420A. Manda argued that this process was standard practice and that it indicated to interested parties that they were not wasting their time with an “unrealistic vendor who may simply be testing the market”. Ultimately, M Osborne J again preferred Manda’s experts, given the sale price of the Property and the expertise of all involved.

Comment

This decision serves as a reminder that a mortgagee’s duty 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 their duty to exercise the power of sale, a court will examine the mortgagee’s conduct as a whole throughout the sale process.

This includes examining whether the mortgagee engaged experienced agents, obtained valuations and considered the appropriateness of advertising strategies, as well considering the impact of any external factors – which in this case, includes the COVID-19 pandemic.