The Australian non-bank lending market grew to $133 billion at the end of 2021 and is projected to continue growing exponentially over the coming years. We have also just recently seen that Wall Street titan, JPMorgan Chase & Co is now entering the direct lending market with an initial investment of at least $10 billion globally.
In light of consumers increasing appetite for private loans, it is important for non-bank lenders to understand what options they can exercise to enforce security provided by the borrower, in an event of default.
Power of sale
In the vast majority of lending, loans are secured by mortgages over real property, with registration of the mortgage being recorded with the relevant land and titles registry.
A power of sale allows a mortgagee to take possession of a mortgaged property and sell it to pay off the loan debt. This power is normally provided for in the mortgage and is also enshrined in section 58 of the Real Property Act 1900 (RPA).
Prior to enforcing a power of sale, the mortgagee must ensure the following elements have been satisfied:
the mortgagor has failed to comply with the terms of the mortgage, such as failing to make loan repayments;
a default notice has been served on the mortgagor; and
the mortgagor has failed to comply with the requirements of the default notice within 30 days after service of the notice.
There are also certain things that must be included in the default notice. In particular, the notice must:
specify that it is a notice pursuant to s 57(2)(b) RPA;
require the mortgagor to pay arrears;
specify a reasonable amount for the costs of preparing and serving the notice (if such costs are demanded); and
notify the mortgagor that, the power of sale will be exercised unless the requirements of the notice are complied with, within 30 days after service of the notice.
A copy of the notice must be served separately on each mortgagor and any other mortgagee that ranks with later priority. It is also prudent that the notice be issued to any occupants residing in the mortgaged property.
If the mortgagor fails to clear the arrears within the timeframe specified in the notice, the mortgagee will be entitled to take possession of the property. The procedure for doing so depends on how the mortgaged property is being used.
If the mortgagor lives in the property
The starting point is to commence legal proceedings for possession of the mortgaged property. Once the mortgagee obtains judgement, it should then make an application for a writ of possession. The writ is then forwarded to the Sheriff who will serve a notice on the mortgagor to vacate the mortgaged property. If the property is not vacated by the date specified in the notice, the Sheriff will evict the mortgagor.
If the property is being leased to a tenant
The mortgagee may make a demand on the tenant for any and all rent to be redirected and paid to the mortgagee. Alternatively, the mortgagee may decide to evict the tenant by following procedures similar to the above. As an additional requirement, the mortgagee must give notice of the legal proceedings to the tenant. Once a writ for possession is obtained, the notice to vacate that is served by the Sheriff on the tenant will allow at least 30 days for the tenant to move out.
If the property is vacant
The mortgagee may simply enter and take possession of the mortgaged property without going to court.
Selling the property
After taking possession, the next step is to sell the mortgaged property. As a mortgagee, you have the power to decide how and when the property will be sold – the mortgagor has no say.
The mortgagee also has a duty to take reasonable care to ensure that the property is sold for market value or, if that is not attainable, for the best price reasonably available.
A sale by auction is ideal to show that the property was sold at the best price reasonably obtainable in the current market.
The proceeds of sale of a mortgaged property are distributed in the following order:
first, to pay the expenses incurred in effecting the sale;
second, to pay the all amounts secured by the mortgage;
third, to pay any subsequent registered security interests; and
fourth, if there is any surplus, forwarded to the mortgagor.
Should there be any disputes regarding payment to any subsequent security interest holders, payment of surplus funds can simply be paid into the Supreme Court of NSW who will hold those funds until the subsequent security interest holders resolve their dispute.
Caveator’s ability to sell
In contrast to registered mortgages, it is sometimes the case that a mortgage is not registered on title, and that a caveat is instead registered so that other parties are aware of the lender’s interest. In these circumstances, a lender can still obtain the power to sell the property (subject to notice requirements), from a court, through seeking an order for the judicial sale of the property.
The power of a court to order a judicial sale is entirely discretionary and the court may consider factors such as whether there is any dispute as to whether the mortgagor defaulted on the loan and whether any registered mortgagee objects to the sale. The court may also make an order for possession alongside the order for judicial sale.
If you require assistance with a defaulting borrower or would like to enquire further about exercising power of sale, please contact Longton Legal’s banking and finance team today.
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action*.
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