In the recent case of Agio Trustees Company Ltd v Harts Contributory Mortgages Nominee Co Ltd, a mortgagee, selling under its power of sale in the mortgage, was held to have breached its duty of care to the mortgagor.

The mortgagee sold the property to an employee of the real estate agent acting for the mortgagee on the sale. The Court held that the sale to the employee of the agency was not in itself a breach of the duty of good faith. However, the purchaser's association with the mortgagee was sufficient to trigger the principle that when a mortgagee sells to a related party the mortgagee has the burden of proving that it took all reasonable steps to obtain the best price reasonably obtainable.

The mortgagee did not establish that its actions to promote and market the property were sufficient to meets its obligations. The mortgagee relied on the marketing campaign run a few months earlier. The Court stated that the mortgagee ought to have undertaken a proper evaluation of the previous marketing campaign with advice from an unconnected and appropriately qualified third party before making the decision to sell.

The mortgagee was also held to have breached its duty by not pursuing another higher offer to buy the property received at a time when it had the right to void the contract it had entered into with the purchaser. The Court found that the mortgagee made its decision not to accept the higher offer without analysing the risks or benefit of that offer. While the Court was not prepared to set aside the sale, damages of $90,000 were awarded against the mortgagee for breach of the statutory duty of care.
This was the amount shown to have been the difference between the best price reasonably obtainable at the time of the sale and the price actually achieved.

This is a general summary only and should not be taken as a substitute for specific advice.

For further information please contact Michael Bos:
michael.bos@phillipsfox.com
Web site: Phillips Fox