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In this article, we look at why it is beneficial as a mortgagee to be in control of the sale process as opposed to a Bankruptcy Trustee realising your mortgaged property to minimize any possible loss in the collection of your debts. This article is not a legal opinion or legal advice and should not be relied on as such.
A mortgagee must firstly have a right to possession for this to apply. A mortgagee's rights to possession can be found in s57 of the Real Property Act.
Very broadly, a default in accordance with an agreement (eg a loan contract) is required before the Mortgagee has a right. Typically, most actions taken by a mortgagee are a result of a loan being in arrears. However there are often many other conditions in standard agreements that if breached will constitute a default giving the mortgagee a right to commence action to obtain possession.
These can include an act of Bankruptcy, failure to pay council rates, failure to pay land taxes associated with the property or failure to progress building works in adequate time (these conditions will vary from agreement to agreement, you should read each agreement to get an idea about what conditions may apply in your specific circumstances). In case of a defended matter, a court will determine if the breach of a particular term is serious enough to warrant a default under the agreement.
Generally monetary defaults are considered to be defaults, though were a court can see a debtor reducing the arrears balance, the Court can be hesitant to give a Possession Order.
In tight LVR situations, it is vitally important to keeps costs to a minimum in order to avoid a loss.
A High Court case in 1933, Universal Distributing Co Pty Ltd (In Liq)  HCA 2 (available on Austlii) which has since been affirmed and applies to real property stated;
If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets. The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it. The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suitThis principle by itself seems reasonable. However put this into the context of a how a Trustee charges compared to the costs for a mortgagee in possession, and it becomes clear that the Trustee is much more likely to incur more costs;
Costs that are common to a mortgagee and a trustee in realising the security;
- Solicitors costs in obtaining possession (though
these costs can vary significantly from firm to firm - LCollect in
conjunction with Collection Law Partners offer a very competitive price.
We continuously come across examples where other firms charges are more
- Court Fees
- Sheriffs fees
- Real estate agents fees (advertising commission)
- Property maintenance (if necessary)
- Any unpaid council rates, strata fees, land taxes etc.
- Solicitors fees contract for sale of land and associated disbursements
Costs that are unique to a Trustee:
- Time charged at a Trustees standard hourly rate (typically in excess of $300 per hour) for time spent on a file. This would include all time spent instructing a solicitor to obtain possession, engaging real estate agents.
Whilst it is true that the mortgagee would also be spending time on the file, this time is often already a sunk cost of the mortgagee as it already has staff that can action these as required. If it is not a sunk cost, the mortgagees standard hourly rate would most likely be cheaper than a Trustees.