Stand up to bank mortgage demands

Catchwords: Property law, acceleration clause, default Conveyancing Act, tender of arrears, Websdale 1991

Upon the default of a farmer making a payment of a single instalment for interest, there is a growing tendency among banks to demand the whole amount of the mortgage is due for immediate payment to the bank.

The guise of legality relied on by the bank is called an “acceleration clause” in the farm mortgage. This provision attempts to give the bank the legal power to demand the whole mortgage is due and payable immediately when a default occurs for a missed instalment payment by the farmer without notice.

Banks attempt to exercise the power of sale after that default. So, if a bank has a term loan for 25 years to the farmer of, for example, $1 million, secured by the farm mortgage, the whole $1 million, plus interest, is demanded now, or “accelerated”, rather than in 20 years or so, whenever the balance of the term of the loan is concluded. By this guise of the “acceleration” clause, the bank can ignore the arrears of interest for the missed instalment and proceed to demand the full $1 million.

There are some stressed farmers out there with written demands on the kitchen table for the whole amount of the mortgage, rather than just the interest arrears. If a bank seeks a power of sale during or after farm debt mediation following a default in paying interest on time on the basis the farmer can’t pay the whole amount of the mortgage demanded, don’t panic.

The case of Websdale v S and JB Investments Pty Ltd, decided by the Court of Appeal in 1991, is authority for the proposition that notice under the Real Property Act “RPA” (S57(2)b) to pay the arrears of interest, within one month, must be given before any further action can be taken for the power of sale for the whole amount of the mortgage.

Section 57(5) of the RPA and the Conveyancing Act S111(5) turns the act of default into a non-default, if the demand is complied with by the month’s end. This means that, post mediation, if the farmer pays the arrears of interest within the month demanded, the bank can’t take any power of sale action for the whole amount of the mortgage before it’s due at the end of the loan term.

However, if the bank fails to make a statutory demand for the arrears of interest alone to cure the default, and demands the whole amount of the mortgage to exercise the power of sale, the farmer can tender the arrears to the bank, in writing, on the condition that it cures the default.

Keep a copy of the letter and the cheque to give to your solicitor. There is a big difference for a farmer being able to afford a few thousand dollars for the arrears of interest, rather than perhaps millions for the whole mortgage which can only be achieved by an imminent sale or refinance of the farm.

Caution is needed, however, because the demand may activate other bank rights, such as a right to appoint a receiver, or take vacant possession. Banks know they need the power of sale, rather than mere vacant possession, because after all, who would want to be a farmer? Farmers should keep this in mind when being asked to waive rights and consent to bank demands for consent to the power of sale at any farm debt mediation.

Take along your solicitor or barrister, stand up to them and get ready with a cheque for the arrears. They are just trying to bluff you!

Jonathan de Vere Tyndall

Updated 6 April 2015, first published The Land paper on 1 June 2000, currently published The Land Farm Online

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.