"Distressed Property" and the Mortgagee's Power of Sale

There have been a number of instances of borrowers suffering from what I call a “distressed property” in recent times as a result of the recession. The “distressed property” in many cases is not necessarily the family home. More often than not it is a property purchased as an investment, often immediately before the recession began.
Typically the market value of the property has eroded significantly since the date of purchase, sometimes to the point where the borrower's equity in the property is negative. However, for a variety of reasons, the borrower has not sold the property, or not been able to sell.

Until relatively recently he may have been locked into an interest rate that was significantly higher than current market rates, and almost certainly significantly higher than the rental income being achieved.
The borrower has been forced to “subsidise” the monthly shortfall and, over time, this has inevitably led to a number of mortgagee sales. Sometimes the sale has not even achieved a price sufficient to pay the bank debt so the lender has then pursued the borrower for the shortfall. Sometimes the lender has pursued the guarantor, and this can be particularly harrowing for families where the guarantor has been Mum and Dad.
This in turn has led to claims from the borrower that the mortgagee has not obtained the best price possible on sale of the property. Following a High Court decision in December last year, the obligations of the mortgagee are clear. The date of sale is the relevant time.
In the High Court case referred to the mortgagee exercised its power of sale under the Property Law Act because of non payment of advances which were well overdue. The borrower claimed that the mortgagee failed to exercise reasonable care to obtain the best price possible, as the mortgagee is obliged to do under section 176 of the Property Law Act.
The borrower argued that the mortgagee incorrectly marketed the property as a lifestyle block when, he argued, its real value was as part of a proposed commercial development.
However the Court held that whether the mortgagee complied with its duty of care turned on whether it obtained valuations that accurately identified the highest and best realistic use of the property at sale date, and whether its agents promoted and secured that potential.
The mortgagee’s agent ran a normal marketing campaign, the property only had commercial potential when amalgamated with adjacent land (and this had not occurred at sale date), and the proposed commercial project had not got off the ground.
Furthermore no offer had been received for the property prior to the auction, and neither the borrower nor any other developers had actually attended the mortgagee’s auction.
These factors and the low level of interest generally led the Court to decide that the mortgagee had exercised its duty of care correctly.
Whether you are a mortgagee or a borrower with a distressed property we urge you to contact us to obtain accurate advice and to explore the options available. Call us on 03 4500000 or email rem@prlaw.co.nz