The New Zealand Bankers’ Association standard form Deed of Priority is a widely used document likely to achieve a renewed prominence in the current flurry of mortgagee sales.
Although the subject of much industry comment, the deed has not often been considered by the Courts. Importance therefore attaches to two District Court cases this year in which the Courts ruled on the meaning of “Enforcement Date” in the NZBA form.
Unhelpfully, the two rulings conflict.
This Brief Counsel looks at the two decisions and examines their implications.
The definition of Enforcement Date is important because it flows through to the definition of Priority Amount. The Priority Amount for a mortgagee will be the aggregate of:
the relevant Mortgagee Amount specified in the document
interest for the Interest Period (specified by the parties, usually 12 or 24 months) commencing on the Enforcement Date on the lesser of the amount outstanding secured under the relevant mortgage and the relevant Mortgagee Amount
reasonable break costs and enforcement expenses, and
interest on those reasonable break costs and enforcement expenses.
Where there is insufficient headroom in the Mortgagee Amount to allow for capitalised or default interest that has accrued prior to sale, the size of the recovery will depend on exactly when the Enforcement Date occurred.The Enforcement Date is defined as the earlier of:
“(a) the expiry date of a notice issued in respect of a Mortgage under section 118 or 119 of the Property Law Act 2007, pursuant to which a Mortgagee enters into possession, or exercises that Mortgagee’s power of sale, of any Land; and(b) the date on which a Mortgagee appoints a receiver of income in respect of any Land.”
Liberty Financial Limited v Finco Holdings Limited
In Liberty Financial Limited v Finco Holdings Limited (12 February 2009, unreported, District Court, Judge A A Sinclair), Property Law Act notices were served but the eventual sale of the secured property was by the mortgagor. Judge Sinclair found that the notice referred to in paragraph (a) of the definition of Enforcement Date is that notice which is relied upon by the Mortgagee to enter into possession or exercise its power of sale. Accordingly, because there was no enforcement by the mortgagee, there was no Enforcement Date.
J T Jamieson & Co Ltd v F M Custodians Ltd
In J T Jamieson & Co Ltd v F M Custodians Ltd (4 May 2009, unreported, District Court, Judge A-M A Bouchier) multiple PLA notices had been served by the second mortgagee prior to the mortgagee sale. Judge Bouchier found that, despite the eventual sale being pursuant to the third PLA notice served (and not the first one), it was the expiry of the first PLA notice which triggered the Enforcement Date and that the phrase “pursuant to which a Mortgagee enters into possession, or exercises that Mortgagee’s power of sale, of any Land” was descriptive of the mortgage and not the PLA notice.
This decision conflicts with Liberty. As a matter of language and context, the Jamieson judgment appears flawed in our respectful view.
- Language: if it was intended that the second half of paragraph (a) was merely descriptive of the notice, it is hard to imagine why the sentence would have been structured this way. The natural reading is that “pursuant to which …” refers back to the notice, not the mortgage.
- Context: Judge Bouchier did not consider paragraph (b) of the definition of Enforcement Date, which refers to the appointment of receivers of income. When taken together with paragraph (a), it is clear that it is envisaged that there be actual enforcement for the Enforcement Date to be triggered.
Much weight was placed, in Jamieson, on the fact that a mortgagee’s power of sale is derived from the mortgage and not the notice, supporting the conclusion that the second phrase in paragraph (a) is descriptive of the mortgage. This ignores the statutory overlay of the PLA in relation to enforcement of mortgages. Under the PLA, a property cannot be sold by a mortgagee without a PLA notice.
What happens where there is a PLA notice but no enforcement?
On the basis that Jamieson was wrongly decided, if there is no enforcement by a mortgagee, there is no Enforcement Date.
Mortgagees will often serve notices and not ever rely on them to sell the secured property. Having a cooperative mortgagor sell the property may be preferable for a mortgagee because this usually means that the GST liability for the sale lies with the mortgagor, not the mortgagee. The possibility that this means the Enforcement Date may not have been triggered should be borne in mind by mortgagees considering this approach.
Where there are multiple notices, which one counts?
Again, on the basis that Jamieson was wrongly decided, it is the notice that is eventually relied on for enforcement which triggers the Enforcement Date.
Where more than one PLA notice has been served and the secured property does eventually go to mortgagee sale, it would be prudent for a first mortgagee to describe all PLA notices that have been served in the transfer recitals. This would lend weight to the fact that the earlier notices were being relied on.
Is the concept of an Enforcement Date appropriate?
Relying on enforcement to allow priority for default interest encourages enforcement by a mortgagee, rather than encouraging a work-out with the mortgagor, or allowing to mortgagor time to refinance. Enforcement will generally be a bad outcome for all parties.
How can mortgagees protect themselves?
In any event, it is imperative that mortgagees endeavour to build into their Mortgagee Amount an additional amount (over and above the principal amount advanced) to ensure that they have priority for interest which accrues prior to the Enforcement Date.
Reviewing the NZBA Deed of Priority
These cases highlight some of the problems with the current NZBA form. There are more still. In Liberty the Court also identifies, without seeking to resolve, difficulties with the calculation of the Interest Period (which is the period for which a mortgagee has further priority for interest in addition to its Mortgagee Amount).
As more lenders lose out on property financing, we will see more issues like this in the Courts, likely involving sums of money significant enough to be heard in the High Court. In relation to the interpretation of Enforcement Date, we think the High Court should take the approach in Liberty.
Although we believe that Liberty is the preferable interpretation, the lack of clarity resulting from the inconsistencies highlighted above suggests that the definition in the NZBA document may need to be reconsidered.