MORTGAGE DEFAULT & the Consumer Credit Code
Re-opening applications…….Who has the Power?
Author; Campbell Hudson
BackgroundThe Consumer Credit Code provides defaulting mortgagors with a statutory shopping list of complaints that they may make against lenders. The list includes:
relative bargaining power of parties; whether or not the provisions of a loan were the subject of negotiation;
whether or not it was reasonably practicable for a borrower to alter or to reject any provision of a loan agreement;
whether or not the borrower was reasonably able to protect his or her interests because of his or her age or physical or mental condition;
the extent to which the borrower received any explanation of the legal and practical effect of the loan;
whether at the time of the contract the lender knew or could have ascertained by reasonable inquiry that the borrower could not pay in accordance with its terms or not without substantial hardship. Anticipated approach by defaulting mortgagor
The defaulting mortgagor, Mr X, is served with a Supreme Court Statement of Claim for possession. He seeks legal advice. He is told that the new Consumer Credit Code provides various grounds for re-opening a loan and that it may be that he has a defence to the possession proceedings.
He brings a re-opening application before the Commercial Tribunal which is dismissed. The Tribunal does not have the appropriate powers to deal with the claim for possession which the lender has commenced in the Supreme Court. Because the re-opening application had to be heard first, the Supreme Court proceedings for possession were effectively stayed.
Whilst Mr X has lost his re-opening application before the Tribunal he has succeeded in delaying possession proceedings.
When the lender became aware that Mr X had filed a re-opening application with the Tribunal in response to the lender's Supreme Court proceedings for possession, the lender should have suggested to the Tribunal that the better forum to hear the re-opening application would be the Supreme Court.
This is because there is no impediment to the Supreme Court dealing with re-opening applications under the Code. Also, the Commercial Tribunal does not have power to issue any Writ of Possession in respect of a judgment given for possession of land.
Comment
Lenders should critically consider their options if a re-opening application is filed after the lender has commenced Supreme Court proceedings for possession. Lenders should not happily submit to the jurisdiction of the Commercial Tribunal given the apparent deficiencies in the Tribunal's powers in dealing with claims for possession of land.
Some aspects of the LIABILITY OF A MORTGAGEE IN POSSESSION
Possession
A mortgagee in actual possession assumes many of the liabilities of the mortgagor. Physical possession not necessary
Even though a mortgagee may not be in actual possession, it may be that the mortgagee is deemed to be in possession by collecting rentals and exercising some control over the security. Furniture on the Premises
A mortgagee who has taken vacant possession is not obliged to look after furniture left on the premises pending their removal. Maintenance of the property
The mortgagee need not rebuild damaged premises and will not be charged with deterioration of the property arising from ordinary decay by lapse of time.
The mortgagee will be allowed the cost of proper and necessary repairs.
If buildings are incomplete or have become unfit for use, the mortgagee may complete them or pull them down and rebuild. Liability for negligence
A prudent mortgagee in possession will take measures which are reasonable in the circumstances to protect the property from unauthorised entry or damage by vandals.
The duty of a mortgagee in possession is not as high as if he were owner of the property. Rather, the duty is of a lower standard requiring that the mortgagee not act with gross or wilful negligence. The mortgagee will be liable for loss due to alterations Injurious to the value of the property. Solution
A mortgagee in possession should make sure that the property is adequately insured and if the premises are to be left vacant for any time any necessary notification should be given to the insurer.
A mortgagee is bound to insure the mortgaged property where it would be regarded as prudent to do so.
A mortgagee in possession is not liable for a failure to insure premises where the costs and expenses necessary to render the premises insurable are prohibitive. Conclusion
Given the strict accountability afforded by being mortgagee in possession it is recommended that mortgagees only take possession as:
a preliminary step in proceeding with a mortgagee sale; or
where the mortgagee wants to protect the security; or
where repairs are necessary as waste of security is likely to occur.
Source; The Gadens Lawyers Mortgage Default Team: www.gadens.com.au/public/publications/~