A typical mortgage or security arrangement will include the power by the financier, upon default, to take possession of the secured property and to exercise a power of sale to recover the debt owed.
Statutory Obligations
Under the Property Law Act 1974 (Qld), such a power of sale is not able to be exercised until at least 30 days after a notice of default has been served (section 84(1)). Such notice must be in the approved form. In exercising the power, the financier or their delegate is under a duty to take reasonable care to ensure that the property is sold at the market value (section 85(1)). This duty to take reasonable care has been found to extend to guarantors in addition to the primary borrower: Higton Enterprises Pty Ltd & Ors v BFC Finance Limited & Anor [1994] QCA 558
Additional obligations apply where the sale is of residential land, including to adequately advertise the property, maintain the property, obtain evidence of value, and to sell at auction unless it is appropriate to sell in some other way: Property Law Regulation 2013, Regulation 3, and section 85(2) of the Act).
Any attempt to contract out of these obligations will be void pursuant to subsection 85(5) of the Act.
Common Law Position
In addition to statutory obligations, at common law a mortgagee must exercise such a power of sale in good faith (Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477) and without acting unconscionably: Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646; [2004] NSWSC 114. However, mere negligence will not normally be sufficient: Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; [1912] HCA 9
There is no absolute prohibition on a mortgagee selling to a purchaser in which the mortgagee has some direct or indirect interest: Tse Kwong Lam v Wong Chit Sen [1983] UKPC 28; [1983] 1 WLR 1349 at 1355. Where the sale by a mortgagee results in a related entity of the financier taking an interest in the land, the critical question will be whether there was an independent bargain: Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd [1978] HCA 21; (1978) 139 CLR at 227. The sale must be independent in the sense of proper and in good faith. The onus rests on the person seeking to uphold the sale to establish that the bargain was a truly independent one: Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) [1965] HCA 17; (1965) 113 CLR 265 at 273; and Bangadilly at 228-229.
If a mortgagee’s equitable duty in relation to its power of sale is breached, equitable relief might include orders setting aside the sale where there is no independent bargain between the mortgagee in possession and the purchaser of the property the subject of the mortgage. If the mortgagee fails to demonstrate the appropriate independence in the transaction, ordinarily the mortgagor would be entitled as of right to have the sale set aside. In practice this means the purchaser is treated as having bought the mortgage and the debt and the mortgagor retains its right of redemption of the mortgaged property against the purchaser: Gordon J in Mijac Investments Pty Ltd v Graham (No 2) [2009] FCA 773; (2009) 72 ACSR 684, at [22] to [23].