Mortgage self help: just because you can, doesn't mean you should

Mortgage default rates in Western Australia are at record highs.¹  Where a mortgagor is in default of their loan agreement and mortgage, a registered mortgagee can take possession of the mortgaged property and sell it to satisfy the debt secured by the mortgage.² 

This is a significant step and the process can have a significant financial impact on mortgagors.  It is therefore imperative that mortgagees adhere to and are mindful of their obligations under Western Australian law and the terms of loan contracts and mortgages before taking possession of property.

General Law entitlement to possession on default

If a mortgagor is in default for a period of more than one month, a mortgagee may sell the land following service of a written demand on the mortgagor.³  However, an equitable mortgagee (or unregistered mortgagee) has no right of possession without an order of the court.⁴

If the loan agreement and mortgage are regulated by the National Credit Code (Code),⁵ a mortgagee must not begin enforcement proceedings to recover payment under a mortgage, take possession of, sell, appoint a receiver for or foreclose in relation to the property the subject of the mortgage unless:⁶

• the mortgagor is in default under the mortgage;

• a default notice has been given to a mortgagor which gives the mortgagor a period of at least 30 days for the mortgagor to remedy the default; and

• the default has not been remedied by the expiry of the notice.

If the mortgagee believes that a default is not capable of being remedied (for example, if there is severe property damage) the default notice need only specify the default and the mortgagee may commence enforcement proceedings or exercise its right to self help on the expiry of the default notice.⁷

There are limited circumstances in which a default notice is not required, being where:⁸

• the mortgagor was induced by fraud to enter into the mortgage;

• the mortgagor has made reasonable attempts to locate the mortgagor without success;

• the court authorises the mortgagor to begin enforcement proceedings; or

• urgent action is necessary to protect the mortgaged property.

Exercising self help

Generally, mortgagees will exercise self help remedies where there is a risk of deterioration or destruction of mortgaged property as a result of a mortgagor’s conduct or the conduct of a third party.  At that point, a mortgagee may exercise self help to preserve the mortgaged property by taking possession of the property to prevent vandalism by changing the locks or by paying an insurance premium to keep the policy on foot.⁹  However a default notice must still be issued to the mortgagor before the mortgagee’s power of sale can be exercised.

A mortgagee must not use more force than is reasonably necessary to take possession of property.  Consequently, unless there is clear evidence that a property has been abandoned by a mortgagor or, depending on the terms of the mortgage, has been left vacant for more than 30 days, a mortgagee will usually seek the court’s assistance by bringing court action for possession of land to afford them protection from any action for wrongful possession.

Consequences of wrongful possession

The failure by a mortgagee to adhere to the requirements of the Code, the terms of its mortgage and the general law may give rise to criminal sanctions and further may leave the mortgagee open to an action for injunctive relief by a mortgagor on the grounds the exercise of the power of sale is improper or has not arisen or become exercisable.

Lavan comment

Whilst Western Australian law permits mortgagees to exercise self help remedies in cases of continuing default by mortgagors, mortgagees should always be mindful of and adhere to the requirements of the terms of mortgages as well as the Code before exercising any self help remedies.  If in doubt, mortgagees should obtain legal advice.