No s57(2)(b) notice required for non-monetary defaults

A recent decision of the NSW Supreme Court is a reminder of the obscure rule that no notice pursuant to s57(2)(b) is required when the default relied upon is non-monetary.

 

18 June 2007

On 17 May 2007 Justice Peter Young of the NSW Supreme Court handed his decision in Elite Apartments Pty Ltd v Arab Bank Australia Ltd1 The borrower was the owner of units 1 to 5 at 18-20 Old South Head Road, Vaucluse. Three of the units were put up for sale by auction as a mortgagee sale by the lender and the borrower disputed the existence of a power of sale.

The “act of default” relied on was a clause that read:

“(if) you (if you are a corporation) are or become … insolvent or steps are taken to make you … insolvent.”

There was a statutory demand was issued on the borrower corporation no steps were taken to set it aside and nothing was paid under it (the borrower was endeavouring to raise money from another source to pay out both the statutory demand creditor and the lender). The Court found this fitted the definition of “steps are taken to make you insolvent”. The borrower argued that although there was a breach the s57(2)(b) notice was invalid. The lender met this by arguing that for a non-monetary default no notice was required. The Court agreed and refused to give an injunction preventing the auction from proceeding. His Honour noted that the non-monetary default exception to the requirement to serve a s57(2)(b) notice only applied because the mortgage dispensed with lapse of time.

Lessons for lenders

A well drafted mortgage is an essential tool in recovery of mortgage funds. Especially important in this instance was the clause that lapsed time. To be valid in all states such a clause should read:

To the extent that the service of any default notice or any lapse of time is required by statute as a precondition to a mortgagee exercising power of sale and/or any other right, then the said notice and lapse of time is dispensed with to the extent it may be dispensed with by agreement.

Perhaps your documents need reviewing. Bransgroves, review, draft and license documents for mortgage lenders. If you want your documents assessed contact us on (02) 9221 9522.

1 [2007] NSWSC 521

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