Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "property problems". This week's question is answered by senior associate Phil Shannon who can be contacted at phil.shannon@simpsongrierson.com
Q. I am looking at a number of properties to buy and a couple of them are being sold by way of mortgagee sale. I have never bought a property from a mortgagee but understand from other people that there are some differences in the way the property is sold.
I am a cautious investor and do not want to assume too much risk in my contracts. As a buyer, what is the difference between a mortgagee sale and a normal sale of property?
A. As the sale is being undertaken by the owner's bank or finance company there are some potential issues that mean you need to take more care than you would in a normal property transaction.
A lender owes certain duties to the home owner when exercising its power of sale. There is a general duty to obtain the best price reasonably obtainable at the time of the sale. This includes advertising the property correctly and undertaking adequate marketing. However, although this duty of care is owed to the owner, the protections available to a buyer in a mortgagee sale are more limited.
When buying a property in a mortgagee sale, you should check whether the agreement for sale and purchase is conditional on the mortgagor failing to repay his or her debt by a certain date. Even in an "unconditional" agreement for sale and purchase, there may be a clause allowing the mortgagee to cancel the agreement if the mortgagor discharges the debt, or brings a legal action to stop the sale from going ahead. This means in some cases you will not be certain that the sale will go ahead until the actual settlement date.
It is also important to check who the agreement for sale and purchase is with. From the time the lender gains the right to exercise its power of sale, the owner is not able to sell the property without the lender's consent. It is therefore unwise to enter into an agreement for sale and purchase with an owner without checking that the bank has consented.
An agreement for sale and purchase in a mortgagee sale is usually different from the standard contract that you have seen in your other property deals. The lender will require removal of some of the more common contractual provisions.
As the lender wishes to dispose of the property as soon as possible, it may be unwilling to negotiate the terms of the agreement, or allow the purchaser to make it conditional. It may be difficult to make the agreement subject to finance or a builder's report, which means that you need to arrange finance and be satisfied as to the condition of the property before entering into the agreement.
Another potential pitfall is that a lender's agreement for sale and purchase will not usually guarantee vacant possession. You should find out whether the mortgagor is still occupying the property, or whether there are existing tenants. If this is the case, it may become your responsibility to make the previous occupiers vacate the property after settlement.
Furthermore, there is usually no vendor's guarantee for the condition of the property, including compliance with the building code.
If you are able to inspect the property before the sale, it will not necessarily be in the same condition on the settlement date.
The owner has the right to remove any chattels that would usually be included in a sale and purchase agreement.
You as the purchaser must bear the risks for any defects or damage to the property, so it may be a good idea to adjust your offer to take this into account.
You should also insure the property as soon as the agreement for sale and purchase is signed, so that you are not out of pocket in the event of damage to the property.
Given the numerous potential issues associated with buying a property at a mortgagee sale, it is important to do your homework before signing an agreement for sale and purchase.
Find out as much as you can about the property, read the agreement carefully, and discuss the proposed purchase with your solicitor.
The information contained in Commercial Property is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
