Further Insolvency Awareness Update – New mortgagee obligations and Regulations under the Property Law Act have now taken effect
Further to our earlier Insolvency Awareness Update titled ‘New mortgagee obligations in the Property Law Act and residential tenancy laws’ (see below), we advise that the substantive provisions of the Property Law (Mortgagor Protection) Amendment Act 2008 (Qld) commenced operation on Friday 12 December 2008.
Also, as foreshadowed in our earlier update, the new Regulation containing the definition of ‘prescribed mortgage’ has been enacted. Key points of the definition are:
- a ‘prescribed mortgage’ is a mortgage over residential land on which a mortgagor’s principal place of residence is located
- it does not matter that the residence is also used for business purposes, so long as the residence is primarily used as the mortgagor’s principal place of residence, and
- a residence does not stop being the mortgagor’s principal place of residence only because the mortgagor stopped using the residence at any time within six months of the relevant default (although we suspect that if it could be shown that the mortgagor had established another principal place of residence, this presumption may be rebutted).
We will continue to monitor the progress of the Residential Tenancies and Rooming Accommodation Act 2008 (Qld), which has now been assented to but has not yet come into operation.
Our original update now follows below.
New mortgagee obligations in the Property Law Act and residential tenancy laws
Last Wednesday, the Queensland Government introduced a new law with the stated purpose of ‘protecting homeowners from mortgagee fire sales’. The Property Law (Mortgagor Protection) Amendment Act 1974 (Qld) (Act) has been assented to and will commence on a date to be fixed by proclamation. Given the speed with which the Act was passed, this may occur prior to Christmas.
The Act amends the Property Law Act 1974 (Qld) (PL Act) and introduces the following changes:
- the mortgagee’s duty under the PL Act to take reasonable care to sell mortgaged property at market value will now expressly apply to receivers and to mortgagees selling under power of attorney, and
- there are specific steps which must be taken by a mortgagee or receiver when selling property under a ‘prescribed mortgage’ and failure to take such steps may be punishable by fines of up to $20,000. The term ‘prescribed mortgage’ has not yet been defined. The explanatory notes accompanying the Act provide that the type of mortgages intended to be captured are mortgages over land of a consumer credit nature.
Parliament has also passed the Residential Tenancies and Rooming Accommodation Bill 2008 (Bill). Among other changes, this law will increase the notice period that must be given by a mortgagee to terminate a residential tenancy granted without the mortgagee’s consent from one to two months. The Bill has today received the Governor’s assent and will commence on a date to be fixed by proclamation.
Implications in practice
The changes in the Act should have only a limited impact on the current practices of prudent mortgagees and receivers. A receiver’s duties under the revised section 85 are consistent with the existing duties under the Corporations Act 2001 (Cth) (Corporations Act) and the steps required in the case of a ‘prescribed mortgage’ reflect what most prudent practitioners are already doing. If anything, the Act simply reinforces the need for practitioners to adequately document the steps taken in determining and obtaining market value. The changes in the Act are set out in more detail below.
The changes introduced by the Bill may be more significant in practice. In cases where residential tenancies have been granted without mortgagee consent, adding an additional month to the amount of time required for mortgagees to obtain vacant possession should be taken into account when undertaking marketing campaigns and preparing the contract of sale. Termination notices must comply with the legislative requirements and the mortgagee will need to become familiar with new notice periods and requirements which apply depending on the residential tenancy type.
Detail of changes introduced by the Act
Extending the operation of the section 85 duty
The existing section 85 of the PL Act imposes a duty on mortgagees to take reasonable steps to sell mortgaged property at market value. As a result of the changes, the mortgagee’s duty will now also expressly apply to:
- ‘mortgagees, including as attorney for the mortgagor’, and
- ‘receivers acting under a power delegated to the receiver by a mortgagee’.
Nothing in the revised section 85 will affect the operation of section 420A of the Corporations Act which already imposes a similar obligation on receivers.
Requirements for a ‘prescribed mortgage’
The Act also introduces the concept of a ‘prescribed mortgage’ which will be defined by regulation (not yet produced). The explanatory notes accompanying the Act suggests that prescribed mortgages will be mortgages over land of ‘a consumer credit nature’ (for example, home loans for primary residences and may also include real property mortgages that secure consumer borrowings such as car loans and personal loans).
In the case of a ‘prescribed mortgage’, the new section 85(1A) will require that the mortgagee or receiver do each of the following (unless the mortgagee or receiver has a ‘reasonable excuse’ and there is no indication what Parliament considers a ‘reasonable excuse’):
- adequately advertise the sale
- obtain reliable evidence as to the mortgaged property’s value
- maintain the property, including by undertaking reasonable repairs
- sell by auction, unless it is appropriate to sell in another way, and
- do anything else prescribed by regulations (and there is no indication what may be prescribed – this was a point of concern to some members of Parliament).
Failure to comply with the requirements can result in a fine of up to $20,000.
Future direction
An interesting point to note is the Queensland Parliament’s willingness to act swiftly and decisively in addressing the interests of mortgagors in the current financial climate—the Act was given only two hours for debate, was not vetted with external parties such as the Queensland Law Society and yet was hastily passed despite the reservations of some members of Parliament.
Further, Parliament has indicated that the Act is unlikely to be the end of reforms, with some members advocating the introduction of a cheaper, simplified sale review process to be overseen by the Department of Fair Trading. As discussed above, Parliament has also passed the Bill which, upon commencement, will increase the notice period to be given by a mortgagee to terminate a residential tenancy before selling mortgaged property from one to two months.
Next year may be a year of significant activity and reform in this space and we will keep you informed on key developments.
This article was written by Peter Smith, Partner*, Leyton Cronk, Solicitor, Brisbane and Leone Costigan, Senior Associate, Sydney.
* Effective 1 January 2009
More information
Should you wish to discuss the new reforms or any other aspect of mortgagee or receiver sales, please contact Peter Smith on (07) 3258 6613.