Nolan revisited the mortgagees power of sale against the mortgagors home clarified

In 2010, we reported on Perpetual Trustee Ltd v Baranov [2010] VSC 18, which was distinguished both at first instance and on appeal from Nolan v MBF Investments Pty Ltd [2009] VSC 244. In Nolan, MBF Investments appealed the decision of Vickery J.

Last week, that appeal was upheld in MBF Investments Pty Ltd v Nolan [2011] VSCA 114. The Court of Appeal, similar to the court in Perpetual v Baranov, confirmed that a mortgagee may exercise its power of sale against a mortgagor’s home.

The facts of Nolan v MBF

Mr Nolan granted and subsequently defaulted on a mortgage in favour of MBF over his property. MBF sought to exercise its power of sale under s 77(1) of the Transfer of Land Act 1958 (Vic) (TLA). Prior to the sale, the property was sub-divided into three lots: Lot 1 was Mr Nolan’s family home, while Lots 2 and 3 were vacant. MBF received independent advice regarding the land value and the optimal selling order of the three lots. Mr Nolan requested that MBF refrain from selling Lot 1 and instead sell Lots 2 and 3 first to discharge the debt. MBF sold all three lots at public auction.

Nolan v MBF at first instance

Vickery J held that Mr Nolan had a ‘home occupation interest’ in Lot 1 and that by failing to have regard to this interest and selling all three lots, MBF was in breach of s 77(1).

Vickery J considered that the mortgagee’s duty to have regard to the mortgagor’s ‘interests’ under s 77(1) is not confined to simply taking reasonable steps to obtain the best price for the property, consistent with the mortgagee’s security entitlement. Rather, MBF was compelled to also consider Mr Nolan’s home occupation interest.

The decision of the Court of Appeal

In upholding the appeal, Neave, Redlich and Weinberg JJA determined that Mr Nolan did not have a home occupation interest, and as such, MBF was not required to have regard to this interest under s 77(1).

The mortgagor’s ‘home occupation interest’

Although a mortgagor has a right to redemption upon repayment of the debt, this does not amount to a right of home occupation. Vickery J incorrectly held that, at the time of the auction, Mr Nolan had a right to remain in possession of the land as against the mortgagee.

The mortgagee’s duty under s 77(1)

The Court of Appeal agreed with Vickery J that a mortgagee must act in good faith, and must take reasonable steps to obtain the best price consistent with its security interest.

However, overruling Vickery J, the Court of Appeal held that MBF did not act in reckless disregard of Mr Nolan’s interests. Considering the advice given to MBF, the court was satisfied that there was sufficient doubt as to whether the sale of Lots 2 and 3 would be adequate to discharge the debt. In such circumstances, the mortgagor has no right to require that the securities should be offered for sale in a particular order.

Accordingly, MBF did not breach its duty under s 77(1) of the TLA.