Introduction
Difficult economic times have led to an increase in the number of properties being sold by mortgagee sale.
The most common instance of a mortgagee sale is where a Bank exercises its power of sale where the owners of a mortgaged property have failed to pay their bank loan. For simplicity, in this article the mortgagee is referred to as “the Bank.”
It is important to note that even where the Bank sells a property as mortgagee, the Bank never becomes the owner of the property. This leads to an unusual situation where the Bank is selling property that it does not own or control. Because of this, there is additional risk placed on the purchaser. If you are interested in buying, bidding or submitting a tender on a property being sold by a Bank as mortgagee, it is important you are aware of the risks set out in this article.
This information is provided as a general guide, not an exhaustive list and circumstances will vary depending on the particular property and agreement involved. If you require further information on your particular situation, please seek specific legal advice.
Do your research and preparation
Mortgagee sale properties are most commonly sold by auction or tender. If you intend to bid/tender on a property, you need to do your planning and research about the property before the auction or tender closing date.
We recommend that you look at:
- Arranging finance for the purchase. If you are successful at auction, you will be required to pay a deposit (usually 10% of the sale price) on the fall of the hammer on the auction day. With a tender, you are usually required to submit a deposit with the tender;
- Get a certificate of title search for the property. This will show you any interests relating to the property, which may include caveats, charging orders or other encumbrances registered on the title for the property;
- Get a LIM Report from the relevant local Council, particularly to ensure that any buildings on the property are permitted and have code compliance certificates; and
- Depending on the type of property being purchased, it may also be prudent to get a valuation, builders report, geotechnical report or other relevant information.
We recommend you talk to your lawyer before making an offer on a mortgagee sale property. Often the agreement is prepared as being “unconditional” which means that after you sign or win the auction/tender, you are bound to complete the purchase and have no rights to cancel.
No warranties
As mentioned above, there is additional risk placed on you as the purchaser because the Bank is not the owner or occupier of the property being sold.
With a mortgagee sale, the standard vendor warranties in a “normal” sale and purchase agreement are deleted. The Bank cannot and will not promise that the property, house and chattels will be in good condition because the Bank is not in a position to control this.
Chattels on the property
Chattels are “movable property” – i.e.: items which are not attached to land and are owned by the owners of the property (for example stove, dishwasher, carpet, curtains, light fittings etc). In a standard sale and purchase deal, chattels are included as part of the sale for practicality purposes.
A mortgagee sale agreement will not include any chattels on the property, because the Bank has no right to sell these. Often the chattels are left on the property, but there is the risk that the property owner could remove the chattels before you take ownership of the property.
The Bank is not required to provide you with keys for the property on settlement. We recommend that you change the locks after you take ownership of the property to ensure that the property is secure.
Risk of damage after agreement signed
The period between when you sign the unconditional agreement or are successful at auction or tender up to the settlement date (the day you complete the purchaser and take ownership of the property) is the “danger period”.
The risk of damage to the property passes to you on the agreement becoming unconditional, the fall of the hammer at auction or the tender is accepted. In some cases, the owners of the property or tenants might still be living at the property at the date the agreement is signed, which they are entitled to do until the settlement date.
The owners of the property can become upset by the sale of the property by the Bank. In some cases, the owners have stripped or caused intentional damage to the property. As the Bank does not warrant that the property will be in a good state of repair on settlement, any damage caused in this interim period is at your risk.
You should arrange insurance for the property from the date the agreement is signed. You will need to disclose to your insurer that the property is being purchased by mortgagee sale.
No vacant possession
A similar risk applies to possession of the property. Although you may purchase the property on a specific date, the Bank will not promise you that the property will be vacant on that date.
If the owner or tenant is living at the property on the settlement date, you will still be required to complete the purchase in accordance with the agreement. In some cases, a disgruntled former owner or tenant may refuse to leave the property or cause damage in the interim. If this occurs, it will be your responsibility to remove the owner or tenant from the property, at your cost.
Talk to your lawyer
As outlined above, buying a property by way of mortgagee sale can be a time-consuming and risky process. We recommend you speak to your lawyer about the risks and any particular issues relating to the specific property before you sign an agreement. Doing the relevant investigations before auction/tender can be costly if the purchase does not proceed, but the benefits of being informed far outweigh the cost of being “trapped” in an agreement to buy an unsuitable property.
If you would like further information please contact Kerri Schofield on 07 958 7423.
