Mortgagee sales - the low-down on the new regime

As financiers tighten funding and the market adjusts to the impact of various finance company collapses, the fallout is flowing into the commercial market, says Kensington Swan senior associate and commercial property specialist, David Lister.

Among the properties falling into this category is a development site at Tutukaka that was sold by private treaty through Colliers International in late April, and a fully developed 29-section beachfront subdivision on the Mahia Peninsula in Hawke's Bay that was sold as a single parcel.

How the Property Law Act 2007 impacts mortgagees

The rules governing mortgagee sales are now contained in the Property Law Act 2007 (the ‘Act’).

The Act, which commenced on 1 January 2008, impacts three key areas of the mortgagee sale process:

Extending the duty of care to obtain the best price in a distressed sale.
Providing an opportunity for mortgagees to adopt agreements for sale and purchase and thus expedite the provision of clear title to the purchaser.
Giving mortgagees the continued opportunity to purchase properties in which they hold an interest by sale by the Registrar of the High Court.

1. Duty of care to obtain the best price extended to multiple parties

The Act extends the statutory duty of care to obtain the best price at sale. This duty extends to the current mortgagor (current property owner), any former mortgagor, covenantor, subsequent mortgagee, or holder of a subsequent encumbrance. This extension will result in greater scrutiny during the sale process, and possibly a greater risk of challenge to a mortgagee sale process.

'In a nutshell', says David Lister, 'the new Act both casts a fresh spotlight on the actions of mortgagees and their solicitors, and adds an extra level of robustness to the process'.

What this means for purchasers

One commercial broker who Kensington Swan spoke to said ‘the changes to the duty of care provisions have resulted in greater scrutiny of sales documentation on both sides –from records of enquiry right through to the sale and purchase agreement itself’. And while a mortgagee sale banner on a property advertisement may generate interest, this must be balanced with the desire to obtain the best value – a challenge in a declining market.

2. Adopting sale and purchase agreements –a brand new alternative

The Act now includes the ability for mortgagees to adopt agreements for sale and purchase previously entered into by a mortgagor. This is a brand new mechanism that is a valid alternative to the traditional mortgagee sale process.

The key advantage in adopting an agreement is the mortgagee's ability to efficiently execute a transfer and provide 'clear title' to the purchaser that the mortgagor might otherwise have a difficulty in achieving. If the mortgagee executes the transfer rather than the mortgagor title will pass to the purchaser free from any liability subsequent to the mortgage (unless consented to by the mortgagee) or any prior estate or interest.

Accordingly where obstacles to a mortgagor being able to provide clear title to a purchaser may exist, it may be prudent for a purchaser to approach a mortgagee to adopt the agreement. And it might be in a mortgagee's interest to adopt the agreement so long as the mortgagor acknowledges that the mortgagee does not otherwise assume its liabilities under the agreement.

In some instances this new mechanism of adoption may give all parties in the sale triangle - mortgagee, mortgagor and purchaser - the possibility of achieving each one of their respective aims.

3. Mortgagee's right to purchase

The Act continues to give mortgagees the ability to purchase properties themselves, but only if the sale is conducted through the High Court Registrar.

'Registrar sales have been reasonably infrequent in recent years, mostly due to the perceived prescriptive nature of the process', explains David Lister. 'However, this option may become a more popular vehicle for mortgagee sales in the near future'.

This is because if the market falls further and financiers consider the market value too low to release a property, they may decide to acquire the property and, in the process, safeguard its value.

Summary

Ensure that your agreement for sale and purchase in a mortgagee sale situation is properly drafted.
Explore your alternatives and determine the best options available to you in the mortgagee sale process.
If you are a mortgagee, you may wish to consider whether you may be better off purchasing the property itself in order to try and safeguard its value.

Please feel free to contact David Lister at Kensington Swan for a FREE 15-minute consultation to discuss any of the above and how they pertain to your situation. David would be happy to answer your questions and offer advice on the mortgagee sale process.

Posted: 28 May 2008