The loan
In 2013, Exceed Limited obtained approval for a loan of $85,000 from a finance company to be secured by three sections of land. Exceed was to make five monthly loan payments of $1,724, and final payments of $1,724 and $85,000 by 11 May 2014. Exceed’s director signed an automatic payment form instructing her bank to pay the $1,724 monthly payment.
However, the finance company could only take sufficient security over two out of the three sections and the loan advance was reduced to $50,000. The finance company credited Exceed’s loan account by $35,000 (having already debited Exceed’s account with the full amount of the loan advance – $85,000).
Exceed did not make any monthly payments, despite its broker and solicitor making promises it would, and despite the finance company’s solicitor warning Exceed on 7 August 2014 that a Property Law Act (PLA) Notice would be issued if the debt was not paid.
PLA notice served and sales are attempted
A PLA notice was served on 11 August 2014. Following the expiry of the PLA notice the finance company contacted a real estate agent to arrange the sale of the two sections, and advised Exceed the balance of the debt was increasing.
In October 2014, the finance company put the sections on the market for sale and sought valuations for the two sections. The market value of section A was $65,000, but in a forced sale situation, it was $45-50,000. Section B was valued at $60,000 but in a forced sale situation, $40-50,000. If the sections were sold together, the market value would be $120,000, or $90-100,000 for a forced sale.
Unfortunately, neither section sold at tender. There was some interest from a neighbour who was prepared to pay $65,000 plus GST for both sections. The finance company counter-offered with $77,000 plus GST for both sections, however this was rejected.
Section A sells
In December 2014, Section A sold for $43,000 plus GST and Exceed’s debt was reduced to $30,454.52. The finance company continued to try selling section B, however there was little interest in the property.
In May 2015, the finance company wrote to Exceed’s director saying it intended to recover the balance of the debt under a personal guarantee she had given. In June 2015 Todd took over Exceed’s directorship.
The complaint
On 10 July 2015, Todd complained to FSCL that:
a) The finance company had engaged in fraudulent activity by selling Exceed’s assets even though it was ‘in credit’ because of the $35,000 ‘credit’ to the account in 2013.
b) The finance company was responsible for loan payment defaults because it had failed to act on the automatic payment authority.
c) The finance company failed to follow a reasonable process in selling the sections.
Review
The finance company’s view
The finance company explained this loan was unusual because when the amount advanced was reduced by $35,000, that amount was ‘credited’ to the loan balance. The unanticipated consequence of this ‘credit’ was that the finance company’s computer system considered Exceed’s account to be in credit, meaning the usual warnings that the monthly payments had not been received, were not triggered.
Ideally, the finance company’s computer system should have alerted it to the default earlier, however, Exceed had benefited from this shortcoming because no default interest or penalties were incurred until May 2014.
Automatic payment form
Todd could not explain why Exceed had not noticed that monthly payments were not coming out of its bank account. Todd said the finance company caused the missed payments because it had not lodged the automatic payment form in 2013.
However, an automatic payment is a customer’s instruction to the bank to pay money to a third party. Although Exceed’s director had given the automatic payment form to the finance company, the finance company could not act on it. Ideally, the finance company should have told Exceed’s director to take the automatic payment form to her bank, but the failure to do so did not absolve Exceed’s responsibility to make the payments.
Sale process reasonable
There were several promises by Exceed to pay the debt prior to the finance company issuing the PLA notice. When the PLA expired, the finance company was entitled to exercise its right to sell the two sections.
Section 176 of the PLA states that the mortgagee owes the mortgagor a “duty of reasonable care … to obtain the best price reasonably obtainable at the time of the sale”. The courts[1] have provided some guidance to the mortgagee around what will be considered to satisfy this duty:
- appointment of a reputable real estate agent to market the property
- a valuation report from an experienced valuer
- marketing over a reasonably long period
- extensive marketing and promotional campaign
- a properly conducted auction
- a sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
We were satisfied the finance company met the duty of reasonable care because it:
- appointed a well-known real estate agency
- obtained a valuation from a registered valuer
- marketed the property for one month before tenders closed
- provided the real estate agent’s marketing campaign showing the property was advertised
- attempted to sell the property by tender, but when this was not possible entered into genuine negotiations with potential purchasers
- sold section A for $43,000 when the forced sale valuation was $45-$50,000.
We said that provided the finance company followed the same process as it had previously, there were no grounds to stop the sale of Section B.
Outcome
We found no evidence of the finance company engaging in any fraudulent activity, it was not responsible for the director not arranging the automatic payment, and it had followed the correct process in trying to recover the debt. We did not uphold the complaint.
Our insight
There is a specific process to follow in a mortgagee sale situation. The finance company in this case followed the correct process. Their client’s complaint lacked merit, but from time to time businesses will receive such complaints.
[1] Public Trust v Ottow (2010) 10 NZCPR 879
