Since 1 November 2011, a mortgagee (financial institution) has a higher duty to the mortgagor (property owner) when selling their property as a result of the property owner having defaulted on their loan repayments.
Section 111A of the Conveyancing Act 1998 (NSW) replaces a duty to ‘act in good faith’ with a negligence style duty of care.
Financial institutions already owe this duty to corporations but not to individuals.
Prior to these amendments, the law only required the financial institution to act in good faith. This meant that the financial institution should not act willfully and recklessly and sacrifice the property owner’s interests. The only remedy was for the property owner to go to the Equity Division of the Supreme Court. This meant that sales referred to as ‘fire sales’ were often just that and purchasers would be able to pick up property well below market value, with little or no recourse for the property owner.
Since November 2011 a financial institution must take reasonable care to make sure that the property is not sold for less than market value. If they breach this duty they will be liable to the property owner in damages. More importantly the financial institution will not be able to contract out of this duty. This means that the mortgage documents that are signed when the property owner takes out a loan will not allow the financial institution to exclude the provision.
It is also important to understand that this obligation extends to not only the financial institution but also their agents which would obviously include real estate agents.
The banks must take all reasonable care to ensure that the property is sold for either:
- not less than market value; or
- the best price that can be reasonably obtained.
‘Reasonably obtained’ would mean that the bank must take steps to obtain the best result which may include obtaining professional valuations, advertising the property, leaving it on the market for a reasonable period and allowing inspections.
This is definitely a step in the right direction for those people whose houses are sold by banks. If we can be of any assistance, the property group at Everingham Solomons will be happy to assist you because Helping You is Our Business.
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