Amendments to the exercise of power of sale for disclaimed properties – a welcome respite for mortgagees

On 25 May 2020, Queensland parliament passed the Justice and Other Legislation Amendment Act 2020 (Act) to protect mortgagees of real property from trustees in bankruptcy or liquidators of incapacitated entities disclaiming interests in real property. The Act amends the Property Law Act 1974 (Qld) (PLA), such that a mortgagee is no longer affected by a disclaimer of the interest in real property. This will save mortgagees from incurring significant legal costs as a result of disclaimers, and streamline dealings between mortgagees and insolvency practitioners where there are concerns about disclaimers being issued.

Background to the power to disclaim

Trustees in bankruptcy and liquidators have statutory powers of disclaimer in Section 133 of the Bankruptcy Act 1966 (Cth) and Section 568 of the Corporations Act 2001 (Cth) respectively. The power of disclaimer may be exercised in bankruptcies or liquidations to disclaim an interest in property (including land) burdened with onerous covenants, or property that is unsalable or not readily saleable. The effect of a disclaimer is to vest ownership of land into the State (in order to free the incapacitated entity of its interest in the land pursuant to the disclaimer).

A trustee or liquidator will usually issue a disclaimer where the liabilities attached to the property or debts secured by mortgage exceed the market value of the property, or there may be other concerns associated with the property which pose an insurance risk to the insolvency practitioner.

Issues for mortgagees once property is disclaimed

Prior to the amendments, a mortgagee of real property was required to apply for a vesting order under Section 133(9) of the Bankruptcy Act 1966 (Cth) or Section 568F(1) of the Corporations Act 2001 (Cth) to obtain title by way of a vesting order, in order to convey title under a mortgagee sale. In bankruptcies, these applications were made to the Federal Court of Australia, and in liquidations, both the Federal Court of Australia and the Supreme Courts of States and Territories exercised concurrent jurisdiction.

While vesting orders were rarely contentious, they nevertheless required the Courts’ attention as they were highly procedural and dealt with peculiar legal issues and concepts. This was especially so where potential competing interests over the real property existed. The Court applications were invariably expensive, and an extra and unwanted cost to a mortgagee. Even the filing fees of the Courts were expensive.¹

A Court order vesting title in a mortgagee would also provide ancillary relief dispensing with the need for mortgagees to serve a Form 4 – Notice of Exercise of Power of Sale under Section 84 of the PLA.

The call for legislative intervention was first heralded by the judiciary as far back as 2009,² and has now been answered with the new amendments.

New Amendments

1. The new Section 84A of the PLA clarifies that a mortgagee may exercise a power of sale following a disclaimer of real property by a trustee in bankruptcy or liquidator without the need for vesting orders under the Bankruptcy Act 1966 (Cth) or the Corporations Act 2001 (Cth);
2. Section 359 of the PLA is a transitional provision, stipulating that the new Section 84A applies to freehold property mortgaged before or after the commencement date, but only if the disclaimer was made or has taken effect after the commencement date;³
3. A vesting order is still required where the disclaimer has taken effect before the commencement date;
4. Once the property has been disclaimed, a mortgagee may begin to exercise its power of sale provided it has satisfied the conditions set out in Section 84A(1) of the PLA and the Form 4 – Notice of Exercise of Power of Sale is served on persons with an interest in the land, and the Registrar of Titles;
5. A mortgagee may exercise the power of sale after 30 days from the time the last notice has been given; and
6. Any surplus funds remaining after the exercise of the power of sale of the real property and extinguishment of all secured interests are to remitted to the Supreme Court of Queensland.⁴

Dealing with trustees in bankruptcy and liquidators

Prior to the amendments, it was standard practice when acting for mortgagees of real property, to request trustees in bankruptcy or liquidators to refrain from disclaiming freehold interests of incapacitated entities without first giving reasonable notice. The new amendments put mortgagees in a stronger position in dealing with trustees in bankruptcy and liquidators, and alleviate any concerns about disclaimers.

This article was written by Wayne Jenvey, Partner, Matthew Broderick, Partner, Mark Lightfoot, Partner and Zach Toren, Graduate.

¹ The filing fee for a vesting order in bankruptcy in the Federal Court is $5,830 for a mortgagee that is a publicly listed company (for instance, a major bank).
² National Australia Bank Limited v New South Wales (2009) 260 ALR 115 at [1] (Rares J).
³ The commencement date is 25 May 2020.
⁴ Section 88 of the PLA has been amended to provide for this new payment regime.