In March we reported the decision in Perpetual Trustee v Baranov [2010] VSC18 (“Baranov No 1”).
Baranov No 1 was the first case to consider the decision in Nolan v MBF Investments Pty Ltd [2009] VSC244 (“Nolan”). Nolan established that the ‘interests of a mortgagor’ which s 77(1) of the Transfer of Land Act 1958 (Vic) (“TLA”) requires a mortgagee to consider when exercising its power of sale may include non-economic interests, specifically that in occupying the family home.
The decision in Nolan gave rise to concerns that where more than one security property was held, of which one was the family home, a mortgagee would be required to sell the family home last.
The presiding Associate Justice in Baranov No 1, Mukhtar AsJ, rejected this interpretation of Nolan stating:
'Nolan does not stand for the proposition that where a mortgagee has a choice of securities to enforce, and a homeowner gave the mortgagee the freedom to realise whichever security the lender wanted, the mortgagee is constrained to spare a person’s home if satisfaction can be obtained by realising another available security'.
The Appeal
Mr Baranov appealed the decision. The appeal was heard by Vickery J, the judge in Nolan. His judgement, handed down on 30 April 2010, upheld the decision in Baranov No 1, and confirmed Mukhtar AsJ’s interpretation of the scope of the decision in Nolan.
Specifically, Vickery J stated that:
'Subject to the terms of the security documents, and in the absence of any stipulation, limitation or restriction as to how or in what order a mortgagee may proceed to exercise its right to gain possession of mortgaged properties as a first step to enforcing its securities, the mortgagee may exercise a commercial judgment as to how and when it should proceed.'
Justice Vickery also addressed the issue of the relationship between sections 77 (which deals with the excise of the power of sale) and 78 (which deals with a mortgagee’s right to take possession of a mortgaged property) of the TLA. (It should be recalled that Baranov No 1 was an application for summary judgement seeking orders for possession, not to exercise a power of sale as was the case in Nolan.)
Vickery J rejected the argument that the right to possession is 'concomitant' with a right to sell under s 77 of the TLA, in that one necessarily leads to the other.
In his view the critical distinction is that, whereas the power of sale has final and irrevocable consequences to the mortgagor (thereby justifying the imposition of obligations such as the requirement to sell in good faith and having regard to the interests of the mortgagor’), an order for possession does not always automatically result in the property being sold.
For instance, in Mr Baranov’s case, both s 78 of the TLA and the terms of the relevant mortgage contemplated that the mortgagee, once in possession, could continue to receive income from the property. The mortgage also gave the mortgagee other rights to continue to use and profit from the property after entering into possession, such as a power to lease.
What does this mean?
In considering the implications of the Baranov cases, it should be recalled that neither Nolan nor Baranov have been reviewed by an appellate court.
However, it is clear from both Baranov decisions (as well as from Nolan itself) that the courts will treat Nolan as being determined to a large extent by its relatively extreme fact situation, in particular what Mukhtar AsJ described as the 'irrational, reckless and illogical' behaviour of the mortgagee, in that case.
It is also clear that, in the absence of such extreme fact situations, courts will give effect to the terms of the loan and security documentation.
In this context, mortgagees concerned that Nolan might potentially force them into an enforcement strategy against their commercial interests, or that the implications of that decision might result in the clear terms of their standard documents being overridden, should now be relatively comfortable.
Author: Martin Irwin