The lender exercised its power of sale without advertising or listing the property with a real estate agent and failed to obtain an updated valuation. The mortgagor argued that the lender breached its statutory duty to take reasonable care to ensure the property was sold at market value.
The court found that the lender decided to sell because the sale price exceeded the valuation completed four months earlier.
Section 85 of the Property Law Act requires a mortgagee to take reasonable care to ensure that property is sold at market value. There are no hard and fast rules but in the ordinary case, a mortgagee is expected to obtain an up to date written valuation before sale, or to take steps to attract potential buyers by advertising or listing or other means. Any person damnified by the breach of duty has a remedy in damages against the mortgagee exercising the power of sale.
The court found that the lender breached its duty to take reasonable care in two ways:
- by failing to obtain an updated valuation or at least an estimate from local real estate agents at the time of sale; and
- by failing to put the property to market by advertising it or listing it with local agents.
The court found that the lender had no reliable information concerning the current market value of the land at the time of sale. This was because there was a threat of litigation from the owner of an adjoining lot concerning access easements. The court found that the mortgagee was not in a position to make an informed decision about the merit of the threatened claim because it had not obtained legal advice.
Further, the threat of litigation made it all the more important to take the property to the market and increase the number of potential purchasers. Even if a majority of potential purchasers were deterred from making an offer because of the dispute, there was a prospect that some purchasers would acquaint themselves with the nature of the adjoining lot owners’ claim and formulate an offer to purchase. If this had occurred there would at least have been more than one prospective purchaser. The court also found that if the threatened claim was of real concern to the lender, then the lender’s statutory duty would have required it to investigate the dispute.
The valuation experts retained by the parties all adopted the comparable sales method, taking account of market movements. The court found that the market value of the land was increasing prior to its sale and was greater than the value adopted in the old valuation, even taking account of the potential legal claim. However the court preferred the evidence of the mortgagee’s valuation expert which gave weight to the disadvantages, such as the risk of litigation.
The court calculated the damages as the difference between the market value and the sale price, less marketing costs and commission and awarded interest at 9% from the date of sale to the date of judgment. Using this formulation, damages were assessed at $65,000.