Federal Court asked to consider whether mortgagee breached its duties by selling property for less than market value despite proper marketing and sale by auction

05 March 2010

---

The recent case of Apostolou v VA Corporation Aust Pty Ltd [2010] FCA 64 involved a claim against Perpetual Trustee Company Ltd (Perpetual) that it had breached its duties as mortgagee by selling a property for less than market value.

VA Corporation of Aust Pty Ltd as trustee of the VA Unit Trust (VAC) acquired property at 181-185 St Kilda Road, St Kilda (Property). In September 2001, Perpetual (as custodian of the Challenger Howard Mortgage Fund) was granted a mortgage over the Property to secure a loan to VAC of approximately $1.2M.

VAC defaulted under the loan and Perpetual took possession of the Property. On 5 February 2008, Perpetual obtained a valuation which assessed the market value of the Property as $2.5M to $3M with a forced sale value of $2.5M. On 6 March 2008 the Property was sold for $4.6 million by public auction.

However, a valuation obtained from an experienced valuer by VAC for the purposes of the trial (which was founded upon an analysis of 72 sales) valued the Property at $5.7M as at the date of the auction. According to the evidence, Finkelstein J accepted that the Property was sold for less than market value.

Justice Finkelstein of the Federal Court referred to authorities which suggested that, in determining whether there has been a breach of duty in exercising a power of sale:

• the first question is whether the mortgagee has taken proper steps to advertise and sell the property;
• if the clear answer to that question is yes, the court may regard the resultant sale as the best evidence of the current market value of the property so that no regard need be paid to other valuation evidence;
• if the answer to the first question is doubtful, valuation evidence as to current market value may assist to resolve the doubt.

In relation to Perpetual’s sale of the Property, Finkelstein J held that, following a reasonable advertising campaign by the marketing agent appointed by Perpetual, the best price possible was achieved at the auction.

There was no evidence of any act or omission on the part of the marketing agent which led to the sale price being below the market price. The marketing agent had commenced advertising one month prior to the auction date with advertisements in The Age newspaper and also on the auctioneer’s internet website and on affiliated sites. A marketing brochure and detailed property report was prepared and widely distributed and the auction itself was well attended.

Finkelstein J found that, in the absence of evidence that there had been conduct that amounted to a breach of duty on the part of Perpetual or its agents who conducted the marketing and auctioning campaign, the sale of the Property at less than its true market value was simply a fortuitous result for the purchaser. For these reasons the application was dismissed with costs.

The case highlights the importance of a mortgagee ensuring that a proper and reasonable marketing campaign is undertaken in respect of mortgaged property.

---

This article provides information about topical legal issues.
Information contained in this article is intended as an introduction only and should not be relied on in place of legal advice.