Bankers must get on with
the job of selling a property security as mortgagee in
possession … or face the consequences
Selling a commercial property security can take time
because buyers can be scarce.
Bankers have always assumed that they have all the time
in the world to sell a property under a power of sale,
without liability for loss because of delay.
This assumption is no longer correct following a decision
of the Supreme Court of New South Wales - Commonwealth
Bank of Australia v Thompson  NSWSC 149.
In Thompson, the force of the expert evidence
served by the defendant (the guarantor) led to the Bank
abandoning its claim for interest, which amounted to over $1
M, to atone for its delay in selling a commercial property
The property development
The sleepy country town of Biloela is an unlikely place
for a $3.2 M townhouse development.
But in the halcyon days of 2005, BankWest
[BankWest was acquired by the Commonwealth Bank of Australia
in October 2008] offered a
commercial advance facility of $1.84 M to fund a property
development project to build 10 four bedroom townhouses. The
feasibility was based on a strong demand for rental housing
in Biloela, which is a rural service centre with a
population of approximately 6,000, in central eastern
In early 2009, 7 townhouses were completed. The
properties were marketed for sale. 1 property was sold. 6
townhouses remained unsold, and were rented.
In August 2009, the loan facility both reached its limit
and expired. The development company had run out of funds to
complete the 3 townhouses which were in a lock-up state. The
loan facility could not be refinanced. Various attempts made
to sell the properties had failed.
On 11 April 2011, the Bank took possession of the
property securities, by appointing a receiver under the
mortgage. The Bank collected the rents, but the rents were
insufficient to cover the interest on the loan facility
In May 2011, the Bank put the properties on the market
for sale by private treaty, but did not attract any offers.
In September 2011, the Bank instituted proceedings
against the guarantor.
The Bank’s claim under the guarantee was $3.068 M,
inclusive of interest, as at the hearing.
The guarantor did not dispute the Bank’s power to enter
into possession and the power of sale.
Instead, the guarantor argued that the proceedings were
premature as the property securities had not been sold, and
that even if found liable, the proceedings should be stayed
until the property securities were sold, for these reasons:
- The Bank’s delay in selling the properties, since it
took possession in April 2011, had caused prejudice to
- In particular, since April 2011, the guarantor had
been unable to cause the debtor company to take steps to
sell or improve the properties for sale, which had
interfered with the debtor company’s ability to pay the
debt outstanding to the Bank. [Thompson
at paragraph 48]
Did the Bank owe a duty to
The provisions of the guarantee were – The Bank is not
liable for any loss caused by the ... delay in exercising a
right or remedy, whether or not caused by its negligence.
In two decisions in 1991 [Westpac Banking
Corporation Ltd v Kingsland (1991) 26 NSWLR 700 (Cole, J)
and also Mailman v Challenge Bank Ltd  NSWCA 182 (per
Sheller JA, with Gleeson CJ and Handley JA agreeing)], the Supreme Court of NSW had
reviewed similar provisions and had rejected arguments that
the Bank owed a duty - to sell a property security upon
the request of a guarantor. Note: in these cases, the
guarantor had made the request because the market was
In Thomson, Associate Justice Harrison had a
different situation to consider, namely, that: the Bank
... took preliminary steps to put the property on the market
and then did nothing for over 18 months.
[Thompson at paragraph 73]
Her Honour drew upon the English Court of Appeal decision
of Palk v Mortgage Services Funding plc
[ Ch 330 at 336-338 per Sir Donald
Nicholls V-C, with Butler-Sloss LJ and Sir Michael Kerr
agreeing], in which
the Court stated –
A duty to be fair
... a mortgagee can sit back and do nothing. But if he
does take steps to exercise his rights over his security,
common law and equity alike have set bounds to the extent to
which he can look after himself and ignore the mortgagor’s
interests. In the exercise of his rights over his security
the mortgagee must act fairly towards the mortgagor.
[Thompson at paragraph 71]
This is the first time that Palk has been
considered in Australia to answer this question –
Does the Bank, by doing nothing breach a duty
to be fair to a mortgagor, and its guarantor?
The expert evidence
The guarantor relied upon two experts to prove that the
Bank had not taken active steps to sell or improve the
properties for sale, which it could have taken.
The two experts were a property marketing consultant and
a registered valuer. Their evidence was that since the Bank
had taken over the management and sale of the properties,
their advertising for sale had been inadequate, the agent
had demonstrated a lack of interest in renting the houses
and the site had been poorly maintained.
[Thompson at paragraph 50]
In terms of lack of marketing, internet searches revealed
no listings, the listing agent had no card in their window,
there was a sign on only one property (not a sign on each)
and no advertisement that the properties were open for
inspection. In terms of lack of maintenance, no one had
taken responsibility: the properties were untidy, the grass
was long, snakes had been reported, and the swimming pool
was closed and green. In terms of lack of management, if a
property fell vacant, it had not been re-let.
The valuer valued the properties at $2.830 M if
completed, and $2.515 M if not.
The Bank did not serve any expert evidence in reply.
The Bank sees the writing on
In early December 2012, after the expert reports were
served and ‘after about 18 months of almost complete
inactivity [Thompson at paragraph 67], the Bank appointed new exclusive real estate
agents for the sale of the properties by expressions of
interest. The Bank agreed to fund a marketing campaign.
This met the guarantor’s argument about inactivity as
from December 2012, but not the inactivity before that date.
On the last day of the hearing, the Bank saw the writing
on the wall that the Court was leaning towards granting
relief to the guarantor, and during closing submissions:
... the Bank made a concession that it is only seeking
the recovery of the amount of $1.9 M together with costs of
enforcement on an indemnity basis with interest to run from
the date of judgement. Hence, the ... defendant is no longer
obliged to pay the interest on $1.9 M that accrued over the
period that the Bank was dilatory.
[Thompson at paragraph 74]
Judgment was entered in the sum of $1.9 M with interest
to run from the date of judgment.
- If a mortgagee in possession takes steps to sell a
property, it must take active steps for sale, or it may
find itself unable to recover interest during a period
- The active steps will ordinarily involve an outlay
for marketing, for maintenance, and if needs be, for
- The provisions in the standard security documents
excusing the Bank from liability for delay in the sale
of a property security may need to be revised in the
light of this decision.
This article was first published by Cordato Partners in
Lexology which is an international innovative, web-based
service that provides over 200,000 company law departments
and law firms around the world with a depth of free
practical know-how on specialist areas of law © Copyright