In June 2018, we assisted one of our government clients to achieve an innovative solution that delivered benefit for both the agency and its defaulting borrower whose security property was in significant negative equity – the first reported foreclosure in Queensland since 1981.
The result provided the agency with protection, control and costs savings, and the defaulting borrower with certainty and removal of all residual debt.
Gadens acts for a government agency which advances loans to people of generally modest means to purchase residential properties, principally in regional areas.
The agency has both commercial and social goals. It seeks to lend moneys (with interest), and therefore to protect and increase the fund from which it lends; but when mortgagors default, it can face difficulties with recovery of residual debts once security properties are sold.
Since the end of the mining boom, the agency suffered significant losses on mortgagee-in-possession (MIP) sales in regional areas. With a view to reducing this loss to its fund, the agency is seeking to retain certain properties until markets improve and to rent them out to others of the agency’s clients in the meantime.
Holding security properties indefinitely as MIP holds many inherent risks for the agency, as well as having the additional drawback of preventing defaulting borrowers whose names remain on title from accessing social housing.
In collaboration with the agency, it was decided that foreclosure of the relevant mortgages was a solution that would offer benefits to the agency and the borrowers in circumstances where the value of the property was significantly lower than the amount of the outstanding debt owed to the agency under the housing loan.
An ancient remedy
Foreclosure, or more correctly, “foreclosure of the equity of redemption”, is an old remedy. Under old system title, mortgages involved the actual conveyance from the mortgagor to the mortgagee of the legal title to the property. The mortgagor retained only a right to redeem the mortgage by paying the outstanding amount of the loan secured by the mortgage. Up until the date that repayment was required, this was a legal right. But after that date, the legal right was lost, and only an equitable right of redemption prevented the mortgagee from retaining full ownership of the mortgaged property. This “equity of redemption” allowed the mortgagor to tender the amount owing even after the date for repayment and require the mortgagee to re-convey to them the legal title of the mortgaged property. “Foreclosure of the equity of redemption” extinguished the right to redeem and gave the mortgagee full title of the property, while releasing the mortgagor from the debt.
Foreclosure remains a remedy under Torrens title and is specifically provided for under section 78 of the Land Title Act 1994 (Qld). As it involves the mortgagee giving up all right to the debt in exchange for the property, foreclosure is far less popular in modern practice than MIP sale of the security property, which allows any residual debt to be claimed. Indeed, insofar as we are aware, no foreclosure has been ordered in Queensland since 1981. However, in the circumstances of our government client, the remedy suited its social and commercial objectives well.
Our client’s borrower was in monetary default under a loan made by our client and secured by a regional residential property. The property’s value, as established by a fresh valuation, was significantly lower than the amount outstanding under the loan due to market declines post the end of the mining boom. The agency was in possession of the property, and wished to rent it out until the local property market improved, at which time it may be sold.
An application for foreclosure was made to the Supreme Court for foreclosure of the mortgage over the property. On the Court being satisfied that the mortgagor was in default and that the property was worth less than the outstanding debt (to avoid the agency receiving a windfall), the Court made orders for foreclosure. These orders provided the mortgagor a period of time to pay the outstanding amount of the debt and redeem the mortgage. If the borrower failed to do so, the equity of redemption was extinguished, along with the obligation to pay the loan, and the agency became entitled to have the Titles Office register the agency as the owner of the mortgaged property.
Innovative solutions can, in the appropriate circumstances, be shaped to achieve litigation outcomes that offer benefit to all parties involved.
Guy Edgecombe, Partner
Craig Melrose, Solicitor