Selling Rural Real Estate for Mortgagee in Possession

DATE: 13 November 2015

Case study

Some seven years ago, Mr Smith sold his rural property at Bencubbin to Mr Brown and provided vendor finance in the amount of $560,000.00 for a five year term secured by way of a second registered mortgage over the land at Bencubbin (Land).

Despite various negotiations between Mr Smith as lender and Mr Brown as borrower, Mr Brown failed to repay the debt and is in default of his interest payments.

Mr Brown approaches you as the local real estate agent servicing the Bencubbin and surrounding districts to proceed to advertise the Land for sale by public auction as he has advised you that he has taken possession of the Land as a result of the default of Mr Brown in his obligations under the second registered mortgage.

You, as the principal of the real estate agency, are concerned as to the possible risks your agency will be assuming by accepting the instruction to proceed to sell the Land by way of public auction.

The property comprises the Land having an area of 3,120 hectares, a water licence and mobile plant and equipment that you would normally find on a rural property at Bencubbin. Issues to consider

Being presented with such a proposal raises a number of significant issues for you as principal of the real estate agency. I set out below in bullet point form a number of the issues that you must consider and have answered before you will be fully informed and thereby able to make a decision as to whether to accept the instructions.

The following are some of the issues I consider must be addressed:

Powers of mortgagee

What is the correct legal identity of the lender?

Has the mortgage pursuant to which Mr Smith has taken possession of the land been properly executed by the borrower and any guarantor?

Does the mortgage grant to the lender the power to take possession of the Land and proceed to sell the Land? Does the mortgage cover the Land, the plant and equipment and the water licence? If not, what does it secure and, further, what powers of sale does the lender have in relation to each of them, if any?

Does the mortgage document grant the lender the power to appoint an agent to sell the Land on behalf of the lender?

If the seller is a company, has it been lawfully constituted and does it have the power to lend money to a third party and take security for any loan over personal and real property? Does the lender have the right and power to sell, sign material documents and settle upon any contract for sale with a third party buyer?

Notice of default

Has there been a default by the borrower in his obligations to the lender pursuant to the mortgage? If so, what information and documentation you are relying upon to satisfy yourself that there has been a default?

What notices of default and demand were sent by the lender to the borrower?

What confirmation is there that the notices of default and demand were received by or properly sent to the borrower so as to ensure the borrower was given the notices?

What notice period does the mortgage require the lender to give to the borrower before the lender can exercise his powers under the mortgage and, further, was that notice period given?

Does the notice period comply with the requirements of sections 106- 108 of the Transfer of Land Act 1893 (WA)?

Does the notice of default satisfy the legal requirements of a notice of default as to the amounts due, the period in which the default is to be remedied and the repercussions if the default is not remedied within the allotted time? Property details

Are all of the fences and improvements constructed upon the Land within the cadastral boundary of the Land?

Have all improvements on the Land been approved by the local authority?

Is the lender aware of any taking order relating to the Land or part of the Land or of any intention of any government authority to take or resume all or part of the Land?

Notice of possession

Assuming the borrower has defaulted and has failed to remedy the default as set out properly in the notice of default and, further, assuming the notice of default was properly served on the borrower, what notice did the lender give to the borrower that the lender was taking possession of the Land for the purpose of sale?

Does the lender have a copy of the notice whereby the lender took possession of the Land?

Other encumbrances and interests in the Land

Are there any prior encumbrances to the lender's mortgage and, further, what is the amount due under that encumbrance, which will be paid in priority to the lender from the sale proceeds? Are there any caveats registered against the Land and, if so, how is it proposed that they are will be withdrawn at settlement?

Are there any easements over the Land or any rights of access to the Land that have arisen as a result of adverse possession by a third party?

Monies due and owing under the mortgage

What is the total amount due to the lender under the mortgage and, further, what is the value of the Land at the time of appointment? Does the value of the Land clear the debt, arrears of interest and recovery costs?

Maintenance and repairs

Is there any need for maintenance or repair work or weed control to be undertaken on the Land prior to the Land being marketed for sale? If so, what is the cost of that work and who is to pay for it?

Marketing of property for sale

What is the appropriate marketing procedure that should be undertaken by the lender to ensure that market value is achieved at the public auction in due course? What funds is the lender prepared to place in to your agency's trust account to cover the marketing of the Land for sale?

Valuation of land prior to sale It is the duty of the selling agent to ensure that it obtains market value for the Land at auction and to satisfy that duty the agent must be satisfied as to the market value of the Land at the material time. It is our recommendation that an independent third party valuer, experienced in the valuation of rural real estate, be appointed to prepare a valuation of the Land and establish a reasonable reserve price which, must be kept strictly confidential, and not shared with any party other than the lender.

The valuer must be properly briefed as to the characteristics of the Land so that the valuation that results is accurate and the duty of the selling agent and the lender discharged fully. To that end, all material documents relating to the Land (including, but not limited to, the notices of default and possession) must be provided to the nominated valuer.

Latent defects

We recommend that you always make it a practise of asking the lender whether he is aware of any latent defects in the property such as water contamination or the burial of contaminated material. Warranties and indemnities

If the above situation is presented to you, it is our strong recommendation that you do not proceed to accept the brief unless and until a deed of warranties and indemnity is signed by the lender, pursuant to which the lender warrants that all of the abovementioned information and any other relevant matters that are represented to you are true and correct and, further, indemnifies the real estate agency against any loss, damage or claim that may arise as a result of the agency acting as the selling agent, implementing the marketing programme and conducting the auction sale.. Further, the financial position of the lender must be evaluated to satisfy yourself that the indemnity that is given by the lender to the selling agent is adequate and is supported by assets in the event of a default or breach of a warranty.

Legal advice

It is our recommendation that before you decide whether or not to take up the appointment as the selling agent for the lender in possession of the Land, you take advice from your lawyers as to the above circumstances and issues so that you are fully informed as to the factual and legal issues before you make a decision as to whether to accept the brief from the lender.

If you would like to discuss any aspect of the matter, please contact us

CONTACT

Kim Valenti Principal (08) 9224 6222 [email protected]

This Alert provides a summary of the subject matter covered. It does not render any legal advice. You should first obtain professional legal advice prior to taking any action on the basis of any information contained in this Alert.

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