Avoiding court for mortgage matters

It is a truth universally acknowledged that avoiding court is always better than the alternative. This paper discusses how and why lenders can ‘self help’ in the enforcement of mortgages.

10 February 2009

Why the court is taking so long

The NSW Supreme Court registry is currently overloaded with possession applications. The number of possession applications has been increasing steadily for the last six months notwithstanding the recent interest rate cuts. The rise in unemployment is likely the culprit as the possession list is now beginning to show a greater proportion of bank matters where previously non-conforming lenders dominated.

The compassion factor

NSW judges seem to be giving longer stays on judgments since the credit crisis begun. By way of example on 9 February 2009 Associate Justice Harrison gave a borrower a stay of eviction until 9 April 2009 – a total of two months. This is a significant break from the usual 2 or 3 weeks. This is a disturbing trend for lenders who are facing liquidity issues.

Increased filing of  defences

NSW has become notorious for its Contracts Review Act defences. Since the Khoshaba1 case more and more suburban solicitors have become aware of the unique aspects of a Contracts Review Act. These are:

  1. Even the weakest cases are considered by the courts arguable (allowing solicitors to sign off on spurious defences);
  2. The Court will not grant summary even with the weakest case2

This has resulted in large numbers of Contracts Review Act Defences being filed. Although most defences fail, they serve to delay the lender for up two years. However in the last three years there has only been one reported case where a lender has been ordered to return possession to a borrower so the borrower could raise a Contracts Review Act defence. Accordingly lenders who can gain possession without commencing proceedings have a much lesser chance of becoming bogged down in this way.

Self Help

A lender has no need to approach the court before exercising its rights under contract or law. This means if the lender has a right to:

  1. Enter into possession;
  2. Collect rents;
  3. Exercise power of sale;
  4. Carry out actions in the borrower’s name pursuant to a power of attorney embedded in the mortgage,

then it may do so and does not need to approach the court before exercising those right.

The State’s monopoly on the use of force

The main reason lenders go to court is because the state has a monopoly on the legal use of force. Thus if a creditor is owed money and he knows the debtor has the money in his pocket he cannot forcibly take what is owed to him. The creditor needs a court order and then the sheriff pursuant to a writ can wrestle the debtor to the ground and remove the wallet (if need be). By contrast if the creditor has been asked to mind the debtor’s wallet he can exercise self help (pursuant to the equitable doctrine of set off) without the need for a court order.

It follows that it is perfectly legitimate for a lender (if he has a legal right to do so) to take possession of a property without a court order. However he may not use more than reasonable force. In Hemmings v Stoke Poges Golf Club3 the owner sent 4 or 5 men to take possession. The occupiers resisted, but only in a passive manner: the occupant “was either led or gently pushed out of the house”, whilst his wife and infant child were carried out on a chair on which they were sitting. The furniture was also carried out and placed in the garage. The Court did not consider this to be a case of forcible entry.

Suspension of the right of self-help

A lender entitled to possession may temporarily lose the right to use self-help by commencing legal proceedings for possession4. Once a favourable judgement is received the plaintiff is once again free to use self-help to take possession, and need not use the Sheriff5. Although there is normally little reason to do so given that it is then generally easier to rely on the sheriff to take possession.

Does a lender have the right to take possession by way of self-help

It depends on the mortgage. A poorly drafted mortgage, and there are many of them about, even ones used by supposedly competent law firms, often omits a right to take possession upon default. This forces the lender to go to court even if the property is vacant 6.

Is notice required before taking possession?

No notice is required under s 57(2)(b) of the Real Property Act before taking possession7. However if the loan is a consumer credit code regulated loan then a s80 notice is, in most cases, required. A s57(2)(b) notice is required before the property can actually be sold (ie: contracts exchanged) however it can be served after the lender has taken possession.

When is self-help appropriate?

We recommend that lenders go to court where the property is an occupied residential property. In theory your agent could gently lead the occupier out and carry his wife out sitting on a chair as occurred in the Hemmings case (see above). However that was an English case, in Australia your agent would be far more likely to be assaulted. However in Australia taking possession of vacant residential property or performing a “lock-out” of commercial premises after hours is usually risk free.

How do you take possession?

The first thing you should do is arrange a locksmith to meet you at the property. Then you should arrive at least 30 minutes before the appointed time. Break in by using a jimmy bar on one of the windows and then open the front door from inside. The locksmith will then arrive and find you in possession of the property and the front door open. Under these circumstances he will be happy to change the lock barrel. If you ask a locksmith to break in they will never do it. The fear of god is put into them at locksmith school and they will only pick a lock in the presence of the Sheriff. Do yourself a favour and do not reveal to the locksmith you are taking possession, instead just discuss the weather.

If the front door is deadlocked then use a pointed cold chisel (a Philips head screw driver also works) and a mash hammer to punch out the barrel of the lock. Usually this will be unnecessary as there will normally be a sliding door you can open from inside. Once a locksmith sees that you are inside he will pick the front door deadlock.

With commercial property it is best to carry out the operation on a Sunday. Take down all signage and remove stock and furniture to a storage facility. Re-occupation by a tenant or owner or squatter should be dissuaded by removing fuses, removing and storing all chattels, cutting a section of pipe out of upstream of the water meter, cutting mains cables in the roof (use an electrician who can terminate properly). For large commercial properties where vandalism or reoccupation is apprehended we recommend you hire a guard dog to be left on the premise

1 Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41

2 Perpetual Trustee Company Limited v Azzi [2008] NSWSC 1008

3 [1920] 1 KB 720

4 Art Centre v Argyle Bond & Free Stores Co [1976] 1 NSWLR 377

5 MacIntosh v Lobel (1993) 30 NSWLR 441

6 Starceavich v Swart & Associates Pty Ltd [2006] NSWSC 960

7 Long Leys Co Pty Limited v Silkdale Pty Limited (1991) 5 BPR 11,512; NSW ConvR 55-162

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