New Property Law Act - impact on financiers

Tuesday 18 December 2007

Aspects of the new Property Law Act 2007 (the Act) will impact on the way financiers document and enforce their loans and security.

The Act, set to come into force on 1 January 2008, repeals and replaces the Property Law Act 1952.

Broader scope

The Act applies not only to land, but to personal property as well. However, to the extent the Act contains inconsistencies with the Personal Property Securities Act (the PPSA), the PPSA will apply.

Restrictions on acceleration and enforcement

Mortgages of land

The Act prohibits acceleration and enforcement of a loan secured by a mortgage without first giving 20 working days notice (unless the loan is a true "on demand" facility). Enforcement of a mortgage has always required notice under the old section 92, but the prohibition on acceleration is new.

The notice requirement does not prohibit appointment of a receiver on default, but the receiver may not manage, or demand and recover, income from the mortgaged land until expiry of the requisite notice.

A copy of the notice must be served on former mortgagors, covenantors, subsequent mortgagees, caveators and other encumbrancers. Failure to do so can result in the mortgagee being liable for damages.

However, if the mortgagor is a company, and the mortgagee also has a general security agreement over all or substantially all of the company’s assets (including the mortgaged land), then notice is not required to accelerate or for a receiver to exercise the powers conferred on it under the general security agreement. This may result in financiers taking general security agreements where once they might have relied on the mortgage of land alone.

Power of sale

The duty of care to obtain the best price reasonably obtainable at the time of mortgagee sale is now owed not only to the current mortgagor, but also to any former mortgagor, any covenantor, any subsequent mortgagee and any holder of any subsequent encumbrance. This is potentially significant because it increases the pool of those with standing to challenge a mortgagee sale process.

The Act gives mortgagees and receivers express power to cancel a contract for the sale of the mortgaged property, and it also empowers them to adopt an existing agreement for sale and purchase. However, the Act is silent on whether this gives rise to any liability for the receiver or mortgagee for the vendor’s warranties.

Mortgages of goods

The Act also sets out notice provisions in respect of mortgages of goods. These provisions largely replicate those for mortgages of land, but the notice period is 10 working days and there are some carve-outs for certain types of goods.

In general terms, the notice provisions for enforcement match those of the PPSA.

Priority amounts

Sections 89 to 94 of the Act regulate priorities between mortgages, and replace the old section 80A(2) and related sections.

In most situations market practice is likely to remain unchanged – financiers can, under section 92 of the Act, nominate an amount up to which their mortgage will retain priority over subsequent mortgages. The amount can be expressed in any currency and can be "plus interest". If it is not expressed as being "plus interest" the interest component will be included within the stated priority amount.

It is important to note that priority amounts are now relevant for security over all "property", rather than just land. Property is broadly defined, and on this basis financiers should consider adding priority amounts into general or specific security agreements, regardless of whether or not such agreements create a security interest over land.

Terms implied into mortgages

The Act schedules terms to be implied in mortgages over land and in mortgages over goods. The terms are more extensive than those implied in the old property law act, although this partly arises from different drafting styles.

The implied terms can be expressly negatived, varied or extended by the terms of the mortgage itself, so financiers are advised to consider their mortgage terms in light of these revised implied terms.

Certificates of non-revocation of powers of attorney

The old property law act required certificates of non-revocation to be in the form scheduled to it "or to like effect". The new Act requires the certificate to be in the form set out in Schedule 1. Accordingly, from 1 January, all certificates of non-revocation must be in the scheduled form, with no derivation.

There is currently a vast array of forms of certificates of non-revocation used in the market. From 1 January, lenders will not be able to rely on the statutory protection contained in section 20 of the Act unless the scheduled form of certificate is used.

Retrospective application

Much of the Act applies from 1 January to all loans and securities, regardless of the date they were entered into.

 

For more information please contact:

Hugh Kettle
Partner

David Craig
Partner

Murray King
Partner

Rachel Gowing
Senior Associate